Tuesday, January 24, 2012

Fracking Fix

If your e-mail in-box is anything like mine, it is chock full of messages from far and wide, hawking just about every product or service you can image.  I get a fair number of stock promotion messages, most of which go the way of the male enhancement offers.  However, today I received a very timely message introducing Ridgeline Energy Services, Inc. (RLE:  TSX-V; RGDEF:  OTC/QX).

Ridgeline is focused on waste water management for the oil and gas industry, providing solutions for recycling and reuse of hydraulic fracturing water, recovered chemical flood water and oil sands process water.  “Fracking” or the practice of pumping massive amounts of water into underground structures in order to flush out oil or natural gas deposits has been widely debated.  There is no doubt that the technique has turned feasible many otherwise marginal wells.  The extent of environmental damage though has been a point of contention.

Ridgeline’s water reclamation solution relies on an electro-catalytic technology that was originally developed to extract usable biofuel from used restaurant fats, oils and grease.  Ridgeline apparently teamed up with the inventor to adapt the technology for the treatment of waste water generated by oil and gas operations.  Low cost-of-operation and minimal energy consumption help make the Ridgeline solution competitive against other waste water reclamation services.

As it happens, fracking has been in the news quite a bit recently.  The relatively mild winter (so far) has sent natural gas prices to decade lows.  Drillers have pulled back from production as well as scarp drilling projects in the absence of economic incentive to bring supply to the market.  For example, Chesapeake Energy (CHK:  NYSE)  is curtailing supply and announced it will cut its gas drilling by half.  News like that is music to the ears of environmentalists, but bad news for suppliers and services providers to the oil and gas industry.

We might expect Ridgeline to be in the latter group.  However, as an innovator, Ridgeline might be among the few oil and gas sector companies that can realize strong growth even in a slow period for the broader industry.  The company claims over forty customers in the oil and gas industry and displays a sizable list of its best friends on its corporate web site:

Apache Corporation
Canadian National Resources
Devon Energy
EOG Resources
Enbridge Inc.
Husky Oil
Nexen Inc.    
TAQA North
Talisman Energy, Inc.

Earlier in January 2012, the company closed on the acquisition of Danzik Hydrological Sciences, LLC, the owner of the electro-catalytic technology at the foundation of Ridgeline’s waste water solution.  A series of capital raises, appears to have put Ridgeline in a position to close on the deal as well as move aggressively in capturing market share.  The company appears poised for strong growth at least in the near-term.

Ridgeline shares have a limited trading history and volumes are nominal, leaving a wide bid-ask spread.  Only the most risk tolerant investors will find the shares palatable.  Nonetheless, Ridgeline Energy Services has been added to the Beach Boys Index in the Waste-to-Energy Group.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  REL/TSX is included in the Waste-to-Energy Group of the Beach Boys Index.

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