This High-Growth Company Is Mining Water Into Fuel

May. 2.14 | About: RDX Technologies (RGDEF)

Summary

RDX Technologies (RGDEF) is a wastewater treatment company that uses proprietary technology to extract oil, animal and plant remnants from water and create fuel.

The company more than doubled revenues in the past year, is on track to gross over $50 million in 2014, and expects revenues over $100 million in 2015.

With the introduction of a new franchise model, and multi-year/multi-million dollar contract with a Concho Resources (CXO) subsidiary, investors should consider RDX for long-term growth.

A small Calgary-based firm by the name of RDX Technologies Corp. (OTCQX:RGDEF) is the first to bring the concept of "water mining" to commercialization.

The company's primary business is the treatment and storage of contaminated water, such as the residual wastewater often left over from use in oilfields during hydraulic fracturing.

But rather than simply purifying the water and putting it safely back into the ground, they've developed a secondary solution where they can essentially filter out the "waste" -- which is commonly oil, animal, or plant remnants. Then, instead of throwing out the waste, RDX has the means to extract the residue, chemically separate the different elements, and create fuel.

The "waste polymers" often found in waste water have molecular structures which give them the ability to combust and produce energy.

RDX is able to convert and refine these polymers into No.2, No.4, or No.6 class fuel oils by undergoing a proprietary electro-catalytic and dialysis process.

In turn, these methyl-ester based fuels can be sold off, thereby giving RDX a high-margin, duel revenue stream -- income for cleaning wastewater AND income from selling fuel.

No.2 fuel oil is mainly a distillate home heating oil, but can also be used in some diesel cars and trucks.

No.4 fuel oil is a heavier commercial heating oil ideal for burner installations not equipped with preheaters.

No.6 is a high-viscosity residual fuel oil that's usually blended with No.2 to meet certain specifications. According to the EIA, No.6 is used in steam-powered vessels in government service and inshore power plants. No.6 includes Bunker C fuel oil and is used for the production of electric power, space heating, vessel bunkering, and various industrial purposes. It currently sells for about $90/bbl.

Their treatment plant is located in Carthage, Missouri. It spans six acres and has direct railway connection. It has the capacity to produce 15 million gallons of renewable fuel oil annually. The total storage capacity of ready to ship fuel is in excess of 25,000 barrels.

Last year, RDX acquired a 20-acre water treatment facility in Sante Fe Springs in Southern California where they've begun to undertake water mining activities similar to those at the Missouri plant.

Concho Resources (NYSE:CXO) Subsidiary Contract

A few weeks ago, RDX announced they've executed a multi-term, up to 13-year agreement with COG Operating LLC to deliver more than 45,000 bpd of treated water. COG is a subsidiary of NYSE-listed Concho Resources.

This is a major step forward for RDX. The contract guarantees several million in revenues and legitimizes its technology in the industry. According to information received on the company's business update conference call, breaks down as follows:

Term 1 (year 1-3):

The Concho Resources subsidiary guarantees a minimum of 2 million gallons a day. The minimum revenue is $18.5 million and can increase up to $24 million.

Term 2 (year 4-8):

The second term is an option being held by the Concho sub and is for five years. If exercised, this portion of the contract is worth a minimum $22 million.

Term 3 (year 9-13):

The third term is another 5-year option being held by the Concho sub. If exercised, this portion of the contract is worth a minimum $24 million.

Gross margins for the contract are expected to be about 65%-70% and operating margins about 30%.

Company CEO, Dennis M. Danzik, says he expects to save customers about 50% on their water bill. If that's the case, then it's highly likely the Concho Resources subsidiary will exercise the second and third terms of the contract.

Furthermore, the contract is so large it will involve the construction and operation of a pipeline in south Texas. The total capital cost to RDX is expected to be about $1 million for pipeline and permits.

The contract is also a take or pay contract that started March 1. What that means is that even though the pipeline is not yet operational, the Concho Resources subsidiary is still on the hook to pay about $11,000 a day.

Secondary Business Operations

RDX's other business is the sale and deployment of dissolved air flotation equipment to oil refineries, chemical plans, natural gas processing plants, and various industrial mills.

These units are designed to clarify wastewater and remove suspended waste and solids.

This is done by dissolving air in the wastewater under pressure and then releasing the air at atmospheric pressure in a flotation tank or basin. The released air forms tiny bubbles which adhere to the suspended matter causing the suspended matter to float to the surface where it can then be skimmed out.

Financial Summary

For the Q3 2014 ended December 31st, revenues jumped 151% to $13.2 million compared with Q3 2013. Adjusted EBITDA was $3.72 million while net income for the third quarter was $904,000.

Based on their growth projections, the company is on track to hit annualized revenues of over $50 million for fiscal 2014 and EBITDA of $13 million.

For fiscal 2015, management expects revenues to potentially double to $107 million, EBITDA to range between $19 and $26 million, and EPS to rise to $0.08 - $0.12.

These are quite lofty projections, but seeing as RDX managed to quadruple revenues in a year's time with relative ease...doubling to $107 million isn't unrealistic.

Franchise Model To Drive Growth

While RDX has expanded both their businesses in the past year, they also have a third division that's expected to provide phenomenal growth over the next two years.

In February, the company launched their BlueDot industrial franchise program that allows existing wastewater operations to adopt RDX's treatment and mining systems.

A BlueDot facility has a footprint of 7,500-25,000 square feet and can handle 15,000- 200,000 gallons a day with only 2-3 employees needed.

Using RDX technology, a franchise owner is able to "mine" energy products out of wastewater and RDX will purchase all of the raw material. RDX then refines the material into fuel and sells it on the open market (franchisees will receive a 3%-5% fuel override on sales).

According to RDX, the company can process a barrel of diesel for $23 and sell it on the market for $147.

RDX has plans to sign up at least 40 locations in fiscal 2015 and approximately 300 locations by 2016. They've opened up six BlueDot locations to date.

Final Thought

Though its stock has ran up since the start of this year, it looks like the price is consolidating around the $0.40 mark. I see this as a good potential entry point.

This is a high-growth company with industry leading technology that's just launching a potentially extremely lucrative franchise model.

Furthermore, right now this stock only trades on the TSX and OTC. A listing on the NYSE-MKT or NASDAQ would dramatically increase exposure which could lead to further share price appreciation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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