My next portfolio purchase for Oil and Gas Investments Bulletin is a company which just might be able to do that. The ideas behind Wavefront Technology Solutions (WEE-TSXV; $0.70) are powerfully simple – and are being put into oil fields right now. It has the potential to make the company a very fast growing profitable company, and be a 10-bagger for investors over the next 3 – 5 years.
Few companies fill such a large market need with such a simple product. I put 48,000 shares into the portfolio at 70 cents on May 27. Below you will find my initial report. Further updates will be for subscribers only.
Wavefront Technology Solutions
Trading Symbol: WEE.V
Shares Outstanding 71.5 million
Mgmt Ownership 8.46 million
Cash $17.9 million
Debt $0
Revenue Q1+Q2 $700,000
Loss Q1 & Q2 $4.3 million
Many of the best ideas in life are so powerful because of their simplicity. Wavefront Technology Solutions Inc. (WEE-TSXV; $0.70) is now marketing its proprietary yet simple technology – called Powerwave – that has the potential to greatly increase the supply of oil in every oil field the world.
In its most crass, simplified form, all they do is pulse fluid into an oil well, like a beating heart. Ba-boom. Ba-boom. That pulsing pressure opens up the rock pores in the reservoir only slightly, (this is called increasing porosity), and for a short time, but it increases the flow of oil through the reservoir rock to the well bore dramatically (this is called permeability).
In plain English, Wavefront increases production per well, and per field – usually 10-20%, but sometimes a lot more. And it does this very, very cheaply. It is being used by an increasing number of top tier companies, including a top five global producer, one of Canada’s largest natural gas producers and one of its largest integrated producers. One of the reasons we are buying the stock now is in hopes that one will make a large order.
Logistically, almost all the products are easy to install in 2-10 hours, and none requires a change in the well equipment. It does cost the customer $5-50K to install depending on the product, but payback can be very quick.
Economically, the business model shows obvious and powerful economics for the customer, and Wavefront shareholders.
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At CAD$60 oil, oil companies only need 1.7 extra barrels of oil per day (bopd) out of a typical five well formation to break even on the monthly rental for the product – less than 0.5 bopd per well – and that price still provides very high margin, recurring revenue for Wavefront.
Powerwave can be a game changer for the oil industry worldwide. It was inititally developed in 1998, and so far it has worked in every type of geology and reservoir where it has been used.
I bought the stock today at 70 cents because in my talks with both management and other sources in the oilpatch, I believe their technology could rapidly be adopted by a lot more companies, and used a lot more by current customers. This is not a niche product; it can be used everywhere.
And if I’m wrong, they have $17 million cash, or about 4 years working capital, if sales and costs stay constant. The company does not have to raise money for a long time.
HOW IT WORKS
Producers generally only get 35% of the oil in a reservoir out. (They will announce how much oil they have found – the big number in the press release – and then their estimated recovery factor, in per cent.)
They all leave A LOT of oil behind. Most oil is held in sandy rock formations, and the oil that gets to the well uses naturally large cracks and fissures to migrate through the rock. But most of the oil is held up in sand grains off the beaten path of these “arteries” and is just too costly to recover.
After an oil well’s production starts to decline a lot, producers will try to stimulate the oil formation with water or carbon dioxide or acid or other chemicals. This is called secondary recovery. Wavefront’s Powerwave technology is a secondary recovery technology.
A typical onshore oil field will have four vertical wells and an injection well like the five spot on a dice, repeated as many times over as the size of the field. The injection well is put in the center of the four vertical producers, and water, carbon dioxide or other specialty fluids are injected down that well and flushed out through the oil formation to push more oil towards the four oil wells; and that does work. But for the most part, the water just follows the same arteries the oil originally went along – the path of least resistance.
Powerwave is an injection technology. Whatever the oil company is sending down its injection well – water, carbon dioxide etc -, the Powerwave pulsing helps it sweep through the entire oil formation in a uniform way, moving through the rock pores off the beaten path, and picking up a huge increase in recoverable oil. Ba-boom. Ba-boom. Ba-boom. It dilates the rock pores just like your heartbeat dilates your own blood vessels. See their video on their website, www.onthewavefront.com.
And while it is a small dilation (or increase in porosity), it creates a huge increase in permeability (the ability of the oil to get to the well).
There are literally millions of injector wells in the world, so it is a huge market for Wavefront.
It’s simple. It’s cheap. It works – it increases the amount of oil recovered by 10%-20% (and sometimes quite a bit more). These are very profitable low cost additional barrels. It has no environmental impact. And oil companies don’t have to change any of their own equipment. I asked myself – why wouldn’t every oil company on earth use this technology?
LOGISTICS
Wavefront clients must fill out a very detailed questionnaire on their formation. Wavefront engineers and physicists then run the data through their own specialized, custom computer model to get the right frequency of pulse and pressure, which varies with every type of geology and oil (oil can be very thin or very thick). Clients will tell Wavefront what they want from the injection well (production, pressure), and they adjust the pulse frequency and pressure accordingly.
Sometimes well pressure is increased; sometimes it is not. Wavefront says they have never damaged an oil formation.
Wavefront is building their suite of Powerwave products to be plug-and-play; where the client can insert Powerwave onto the well itself. During this early commercial stage, however, Wavefront is going to each site to install it directly to ensure it’s working properly.
ECONOMICS
All oil companies want to reduce costs per barrel and increase productivity, to improve profitability. Powerwave does that. It actually can have a lot of benefits for a company’s quarterly financial statement. Production and cash flow increases.
After a few months operating, client management will be able to book more reserves and/or resources when they know how much incremental production is. They can book costs over that larger resource, lowering their cost per barrel on their financials. That would clearly impact their stock prices, especially for the juniors and intermediate producers with smaller production bases.
Wavefront will charge $6,000 per month per unit. Right now they are charging half that if companies sign up for a full year. For Wavefront, payback happens in just a few months. Then the recurring monthly revenue is high margin that falls straight to the bottom line.
As I mentioned, there are hundreds of thousands of injector wells in the world, and likely 200,000 in Canada and the US alone. Even at $3,000 per month, 1000 wells is gross revenue of $3,000,000 per month or $36 million per year. Current Wavefront revenue is just over $1 million per year. Management says there are 4500 injector wells in the fields where Powerwave is currently being used.
SO WHY AREN’T SALES GREATER?
If the product is so good, how come they’re not flying off the shelves?
Management says the oil and gas industry is a very conservative bunch, and operators are hesitant to try anything new that could even remotely impact production. The recession and lower commodity prices have not improved customers’ desires to take risks on new technology.
They add that the product has only been commercial for just under two years. They actually have gone out and bought an interest in an oil field in Oklahoma that is using Powerwave, so they can have a showcase for the industry.
I’m sold on the product and its benefits. Management’s challenge is selling it properly – channel to market. They are doing a lot of personal sales calls to larger companies, and they have a slowly growing distribution network.
They previously had a worldwide marketing agreement with Halliburton, one of the largest oil services companies in the world, but for some reason that didn’t work well, so it was cancelled. Interestingly, Wavefront’s VP Sales in Houston was their contact at Halliburton, so he was clearly sold on the product and its potential.
The VP Sales in Calgary is ex-British Petroleum, whom management says came over because he too saw the industry-altering technology as a big winner.
Honestly, I may be a little early still in jumping into the stock, and here’s why: My 20 years experience working inside early stage companies tells me the revenue ramp up, that I see as imminent, might not happen for several quarters as they fine tune their marketing strategy, both in their distribution network and their internal sales. But with a cushion of four years cash in the bank, I am willing to buy the stock now in hopes of fast revenue growth.
FINANCIALS
In fiscal 2008 the company lost $6.95 million on $1 million revenue. In the first six months this year Wavefront lost $4.24 million on revenue of $700,000. Operational revenues were only up 7% year over year for the first six months, with most of the revenue gain coming from interest on the $23 million worth of financing they did in late 2007 and early 2008.
The loss is greater this year so far because Wavefront wrote off a good chunk of their one oil property which they use to showcase their technology.
Wavefront’s net cash burn is about $300,000 per month, and they have 87 units contracted, most of which are in the field. Sales costs have ramped up dramatically in the last year – as they need to do – but have levelled off now. Costs should not increase further without a corresponding revenue jump.
Even at half price units of $3,000/month, CFO Brad Paterson says they only need 120 units to break even. While I believe it will be more than that, only one client order to fill an entire field of 200 injection wells could make them break even very quickly. And that is quite possible. CEO Brett Davidson says there are a total of 4500 injector wells in the fields in which they are now operating.
VALUATION
With a market cap of $50 million and $17 million cash, the market is valuing the technology at $33 million. At this early stage, it is impossible to value the company on a real financial metric. But in 3 -5 years if they have 3000 units making an average of $4,000 per month, that equals revenue of $144 million a year.
I would estimate net margins greater than 50% if they can execute their business plan the way they hope to – which would be $1 per share profit. (Which suggests to me that if they are successful, someone will buy them up.) An industrial/technology stock like this could trade 10-15 times earnings or better.
THE STOCK
There are 71 million shares out. CEO Brett Davidson owns 2.66 million, and CFO Brad Paterson has 128,000, according to the most recent annual information circular. Director Roger Kazanowski has the largest position at 4.679 million. Management says they have influence over 29%, or 20 million shares. The technology has consistently attracted a large institutional interest, with Passport Capital in San Francisco and Sprott in Toronto being the two largest holders I can find. The last $23 million in capital was raised at $0.95 and $1.25. The $20 million before that at $1.35 and $1.80.
The stock hit $5 in 2006, back to $1.20, up to $3 in 2008 and then like all companies, WEE’s stock was crushed to 45-50 cents in fall of 2008. This is our opportunity. At 70 cents I am buying it as cheap as anybody in the last 3 years (except for the last few months).
On the one year chart, volume is biased towards the up days, which is good. The moving averages are converging, meaning a significant move is likely soon (which we hope will be up). Stochastics just triggered a buy signal, with the K line crossing the D line.
However, there is a large seller in the market right now, (which is why the OBV is in a downward trend) so the stock could stay in this range for a couple weeks or more. Possible good entry points would be at a retest of the 60 cent base, or on a volume breakout above 75 cents.
CONCLUSION
Wavefront has a pulsing technology for injection wells that could revolutionize the oil industry, increasing the amount of oil recoverable in every single oilfield on earth by 10-20% or more. That is a staggering number of very low cost barrels.
The business model of monthly rentals would give the company a high margin recurring revenue stream.
The product works. It’s simple and has far-reaching implications for the world energy sector. They have the capital and the sales team in place to ramp up revenue. Management now only needs to execute their plan. Founder and CEO Brett Davidson is still the driving sales force in the company’s development.
Even with no increase in sales, Wavefront has four years working capital in the bank. The technology has only been commercial for 2 years, and my history with these companies says they can cut their teeth for a long time finding the right channel to market and sales strategy. So I may be a bit early in owning the stock. They currently have 87 units in the field.
But I find the product and the business model compelling. It fills an obvious and large need very simply.
And some large companies are trying the product. Even a small order from one of the big guys would validate the technology for the entire industry and, I believe, cause the stock to move up. I’m buying the stock cheaper than almost everybody else in the last few years. WEE goes into my portfolio at 70 cents.
