- Strategic Environmental & Energy Resources is an under-followed micro-cap company, which has a group of businesses that are disrupting the waste management industry.
- Strategic Environmental & Energy Resources is on the verge of profitability with the launch of new waste destruction systems from its Paragon Waste Solutions subsidiary.
- Based on my estimates, Strategic Environmental & Energy Resources could see potential upside of 43% to 117% by 2016.
In this article, I will be examining Strategic Environmental & Energy Resources Inc or "SEER" (OTCQB:SENR), which is a micro-cap holding company that has four subsidiaries, which provide oil services, environmental services, and waste destruction services. The four companies that SEER owns are in the list below and I will be providing an overview for each subsidiary, and then I will look at SEER as a whole.
- Resource Environmental Group Services [REGS]
- Tactical Cleaning
- MV Technologies
- Paragon Waste Solutions
The first question an investor might ask is what makes SENR a buy now at current levels. The main reason why I am highlighting SENR now is that I expect the company to report 1st quarter earnings within the next month. The reason why this is an important earnings for SEER is that it is the first quarter where revenues from its Paragon Waste Services unit will be reported. In 2013, Paragon did not contribute any revenues to SEER; however, the following statement from the most recent earnings report in March shows that Paragon will soon start contributing revenues. "In the fourth quarter of 2013 and first quarter of 2014, however, Paragon secured multiple customer commitments totaling approximately $1.0 million in up-front license fees and on-going revenue-split royalties or monthly licensing payments commencing in 2014. Accordingly, we expect Paragon to contribute to revenue and overall profitability in 2014 and beyond." [J. John Combs III, chairman and CEO] This is a major opportunity for SEER, since they have already secured upfront commitments of $1 million. The $1 million in commitments represents 32.09% of the revenues SEER generated in the previous quarter, and along with the continued high growth of REGS, and MV Technologies SEER is on the verge of profitability, which I believe will lead to a higher share price.
Resource Environmental Group Services
The resource environmental group services focuses on providing cleaning and waste reduction for oil & gas refineries and oil drilling locations. REGS provides oil tank cleaning services for refineries by using a remote controlled cleaning machine. The reason why using a remote controlled machine is important is "The proprietary Track Blaster allows remote-controlled cleaning of large petroleum storage tanks in the safest possible manner by minimizing personnel entry into hazardous working environments." [REGS Tank Cleaning Overview] By having a remote controlled system, REGS is able to clean oil tanks, but at the same time reduces putting workers in a dangerous working environment. In addition to oil & gas refining and drilling services, REGS also provides the following services that are all focused on cleaning up waste:
- Compliance Services
- Construction Waste
- Rail Car Cleaning Services
- Soil & Water Remediation
- Waste Transportation
Tactical Cleaning is an affiliate of REGS and provides rail car cleaning services. Tactical can clean and dispose of waste from rail cars that hold food, chemicals, and oil. In addition, at its facility in Denver, Colorado, Tactical Cleaning can clean tanker trucks and frac tanks.
MV Technologies builds systems that capture & neutralize gases, as well as capturing bio-gas, which can be used for renewable energy. The odor & vapor capturing products that MV Technologies provides are used to capture Hydrogen Sulfide gas from landfills, wastewater plants, bio-gas facilities. Hydrogen sulfide gas has an extremely bad odor, and is corrosive. MV Technologies builds systems that use its proprietary BioActive MediaTM [BAM] to neutralize Hydrogen Sulfide gas. What makes BAM special is that the material that is used to capture the gas is recycled hardwood chips that are treated to be able to neutralize hydrogen sulfide, and because the hydrogen sulfide is neutralized and the media is made of wood, the used wood chips are biodegradable, and can be put in a landfill. The following table from a recent SEER investor presentation shows a comparison of the costs and disposal methods for media that is used to neutralize or capture hydrogen sulfide. As you can see from the chart MV Technologies, solution is the most cost effective way to remove hydrogen sulfide, and provides the most environmentally friendly way to dispose of used media.
The biogas capturing systems MV Technologies provides are used at food & beverage processing facilities, landfills and other industries to capture biogas, which can be used for renewable energy. Landfills generate biogas, and by using MV Technologies products, those gases can be captured and are used to generate electricity for operations at the landfill.
Paragon Waste Solutions
Paragon Waste Solutions offers the CoronaLux™ waste destruction system, which can destroy a long list of waste including:
- Medical Waste
- Hazardous Chemical Waste
- VOCs [Volatile Organic Compounds]
- Refinery Waste
Paragon Waste Solutions is focusing on core areas: Onsite Waste Treatment at hospitals, Regional Collection/Treatment centers, and refineries.
First, Paragon can place their waste destruction system directly at hospitals, which eliminates the need to transport or store medical waste when it can be easily destroyed on site. Because the system is environmentally friendly and there are no harmful by-products, for instance after the destruction of the materials is complete, the resulting material is safe to put in a landfill. The image below from the SEER investor presentation shows the CoronaLux™ system.
Second, Paragon can place their system at waste collection centers where the materials are already sorted and can be easily processed cost effectively and safely using the CoronaLux™ system.
Third, Paragon can place their systems at refineries to minimize solid waste and destroy VOCs. What makes the system great for refineries is that there are "minimal permitting, or pre-installation regulatory requirements" [SEER Investor Presentation] which makes the system attractive to install because of the small amount of red tape. In addition, if a refinery uses REGS services to clean storage tanks Paragon can destroy the solid waste that is removed from the tanks, and is a strong synergy that the two companies under the same roof share. By having the system on-site, refineries can reduce the transport of hazardous waste from operations. For VOC destruction at refineries and on oil fields, the system can be placed on-site, which again reduces the refineries' costs for transportation of hazardous materials.
The most recent earnings report showed the potential for the SEER group of companies, and how close to profitability SEER is. The income statement from the recent SEER earnings report shows that revenues increased 70% from 2012 to 2013. The report also gives insight into how fast the three revenue-generating subsidiaries of SEER are performing. For 2013, REGS Service Revenue increased 89%, MV Technologies Revenue increased 134%, and Tactical Cleaning was "Solid & profitable." Even though SEER has fast growing subsidiaries, the company has been unprofitable, however they are right on the cusp of becoming profitable with the continued high growth in its businesses and the rollout of the Paragon Waste destruction systems. SEER stated in the earnings report "Fourth quarter consolidated net loss was attributable to costs related to the manufacturing and rollout of CoronaLux™ units by the Company's Paragon Waste Solutions subsidiary." With Paragon starting to generate revenues this year, SEER revenues should see a spike because the statement in the section above about Paragon receiving $1.0 million in up-front license fees, and commitments for royalties and monthly licensing payments. That combined with the continued high growth of the other subsidiaries should lead to SEER being profitable in 2014.
When looking at micro-cap companies, it is always a good idea to look at how financially stable [or unstable] the company is. I will be looking at SEER by using three liquidity metrics, a short-term metric [the current ratio], a long-term metric [Long-term debt/shareholders equity], and an overall financial stability metric [the Z-Score].
Current Ratio: The current ratio for SEER was 1.16, which shows with a ratio of greater than one, that SEER would be able to pay off its short-debt obligations if they came due. A ratio of 1.16 is good, however current assets are increasing at a much faster rate than current liabilities, which in the future will lead to the current ratio rising.
SEER Current Ratio
Long-term debt/Shareholder Equity:
The long-term debt/shareholders equity ratio for SEER was .32, which shows that SEER would be easily able to cover its long-term debts with the current assets that the company has at it disposal.
LT Debt/Shareholder Equity
Finally, I used data from the income statement & balance sheet from above to calculate the Altman Z-Score for SEER. I used a Z-score calculator, to calculate the Z-score for SEER. I find the Z-Score important because the Z-score incorporates financial data that can help predict the probability that a company will go bankrupt, which I believe is an important factor when looking at micro-cap stocks because of their high-risk nature.
SEER Financial Data
Market Value of Equity
I entered the data from the table above in the online calculator and found that SEER has a Z-Score of 6.34. To judge how good or bad this number is, the key provided below shows how to judge the results. Therefore, based on the results, I can conclude that based on these figures SEER is a financially stable company. In addition, because SEER is financially stable they have the ability to attract private funding, which strengthens the balance sheet and allows SEER to drive future growth. I will cover the recent private funding that SEER received in the paragraph below.
- Z-SCORE ABOVE 3.0 -The Company is safe based on these financial figures only.
- Z-SCORE BETWEEN 2.7 and 2.99 - On Alert. This zone is an area where one should exercise caution.
- Z-SCORE BETWEEN 1.8 and 2.7 - Good chances of the company going bankrupt within 2 years of operations from the date of financial figures given.
- Z-SCORE BELOW 1.80- Probability of Financial embarrassment is very high.
In addition, in February SEER completed a $4.0 million private placement to accredited investors. From the press release for the private placement the CEO John Combs stated "In addition to strengthening our balance sheet, this capital infusion enables us to advance various product and service offerings across all divisions and, most important, to accelerate the development and rollout of our patent-pending CoronaLux™ systems into the medical waste and oil and gas markets." With the boost in capital, SEER has a strong balance sheet, and the capital necessary to continue to grow all of the businesses under its umbrella.
Financial Stability Conclusion
What I can conclude based on the three metrics I used to cover short-term, long-term, and overall financial health is SEER has the ability to cover its short & long-term liabilities, and its overall financial health is strong as measured by the Z-Score. Because these metrics show the financial stability of the company, it makes it easier for the company to attract private funding, as they received recently.
In this section, I will be focusing on my insight into the potential market opportunities that will drive the growth of SEER in the coming years.
All four subsidiaries of SEER have their various focuses, however the one core aspect they all have in common is they all have products and services that are offered to refineries. One of the main services that REGS offers to refineries is tank-cleaning services, along with other refinery services. SEER can pair its REGS services with the upcoming Paragon waste destruction system to destroy the waste that is removed from storage tanks. Then MV Technologies provides emissions capturing systems to refineries, which captures hydrogen sulfide gas from going into the environment. Finally, Tactical Cleaning provides tank car cleaning services, and with refineries buying their own railcars to move crude oil, they have a need for cleaning services, which can be provided by Tactical Cleaning.
By focusing on refineries, SEER is able to create strong synergies between each subsidiary, and by having all four companies under one umbrella, SEER is able to offer a wide range of waste & environmental services. The reason it is a good idea for SEER to focus on refineries is increased oil production in the United States, brought on by fracking. According to the EIA, since 2008, the amount of oil produced in the United States has increased 48.94% in a six-year period. With the increase in production, there has also been a need to increase refinery utilization to be able to process crude oil to get it to a finished product. I created a chart, which shows the monthly refinery utilization rate in the United States, and the data I used is from the EIA monthly utilization rate table. The first chart clearly shows that the refinery utilization rate has been trending up over the last six years, and this is important for SEER because an increase in utilization means more waste to dispose of and emissions to capture.
In addition, I believe the second half of the year could see increased utilization rates because going back to the last four years [2010- 2014] after the financial crisis, I noticed that there was a seasonal aspect to refinery utilization as well. I took the average utilization rates for the period from January to June, and compared it to the average utilization rates for the period from July to December and found that in the past 4 years refinery utilization has increased in the second half of the year, every year. With an overall increase in utilization and the potential for seasonal increases in utilization, I believe SEER is positioned to take advantage of this.
Average Refinery Utilization
Finally, with increased refinery utilization, and refineries purchasing their own railcars, SEER has a quality opportunity to provide railcar-cleaning services, because of the growth in the number of railcars that are used to ship oil from oil fields like the Bakken, and the Canadian oil sands south to refineries. The chart below from the Association of American Railroads shows that the number of carloads of crude oil has increased significantly in the last three years, and this is where the opportunity is for Tactical Cleaning to provide its services to crude oil rail car owners.
To estimate a 2016 fair value of SEER I used annual data from the last three years of earnings from Yahoo Finance to project revenues for the next three years. The growth rates for historical revenue, gross profit and SG&A were calculated by using the RATE function in excel. The section of the table below labeled "estimates" shows the estimated revenues, gross profit, SG&A, and operating income/loss for the next three years for SEER. As you can see, the table shows that by 2015, my estimate shows that SEER should be profitable, and by 2016, I estimate SEER to be solidly profitable.
Cost of Revenue
Selling General and Administrative
Total Operating Expenses
Operating Income or Loss
Now that I have my revenue estimate, I used two methods to estimate the fair value of SEER. The first method I used was comparing SEER to the companies in its industry with a similar market profile, and the second method I used was to use the current price/sales ratio to get a high estimate for the fair value of SEER. The reason I chose to use the Price/Sales ratio over other valuation metrics like Enterprise Value/EBITDA was because SEER currently has a negative EBITDA, therefore I could not get a good comparison to companies in the waste management industry.
As everyone knows P/S= Market Cap/ Revenues, nothing new there. However, for purposes of this article I am trying to estimate the stock price by using the P/S ratio of the companies in the waste industry with similar market profile and applying that average to SENR to see what SENR would trade for IF it traded at the average. Simply put, I have to "reverse engineer" my way to find my estimated value for SENR in 2016. To do so all I had to do was some simple math: I had my estimated revenues for 2016, and below I have the average industry P/S ratio, therefore all I had to do was find the estimated market cap. This can be done by multiplying the industry P/S ratio by my estimated 2016 revenues, then divide that number by the shares outstanding to get my estimated 2016 stock price.
Method #1: I first looked at the Zacks stock screener for companies in the Waste Removal Services industry to be able to see what those companies were trading at on a price/sales basis. The industry consisted of the following companies [Ordered my market cap]
WASTE MANAGEMENT Inc
REPUBLIC SERVICES Inc
WASTE CONNECTIONS Inc
CLEAN HARBORS INC
US ECOLOGY Inc
NUVERRA ENVIRONMENTAL SOLUTIONS
CHINA RECYCLING ENERGY CORP
N-Viro Intl Corp
To get an accurate comparison of companies with similar market profiles, I took the average Price/Sales ratio of the four companies with a market cap of less than $1 billion. I found that the average Price/Sales ratio for those companies was of 3.16. I am not inferring that 3.16 is the Price/Sales ratio SEER should or will trade at, what I am looking at is what SEER could trade at IF it traded at the industry average of similar companies. I am not saying that SEER is undervalued because of this number because its current Price/sales ratio is 4.79. I simply just wanted an industry average price/sales ratio, and I understand that some companies will have a lower or higher Price/Sales in the industry because of various factors, and I am NOT using that number to value every company in every industry.
I then took 3.16 and multiplied it by the estimated revenues for 2016 to get an $86.29 million market cap, and divided it by the current shares outstanding of 50.574 million to get a 2016 estimated fair value of $1.71, which is 43.39% above the current price of $1.19.
Method #2: For this method, I simply took the estimated revenue total for 2016, and multiplied it by the current price/sales ratio for SEER, which is 4.79 to get market cap of $130.80 million. I then divided that by the current shares outstanding of 50.574 million to get an estimated "best case" 2016 target fair value of $2.59, which is 117.35% above the current price. The reason why I chose to use the current Price/sales ratio to estimate the future value was that SENR has posted extremely high revenue growth from the two largest units of SEER. REGS last year posted revenue gains of 89%, and MV Technologies posted revenue gains of 134%, therefore SENR currently and in the future should trade at a premium valuation to its industry average because of this high growth.
P/S * 2016 Estimated Sales
2016 Price Target
For SEER there are two main risks, the first risk is competition risk from large dominant market players in the refinery waste management & services industry, and medical waste industry. The second risk for SEER is liquidity risk because the stock does not trade a large number of shares.
Refinery Waste Management: A large player in refinery waste management is Clean Harbors, which provides a variety of environmental services, with one of those services being refinery waste management. Being that Clean Harbors is a large company, they have the ability to offer a more complete range of refinery services. For instance in addition to services that SEER provides like storage tank cleaning, and waste processing, some of the other services Clean Harbors also offers are pipeline cleaning, truck cleaning, container rentals. With this complete range of services, Clean Harbors is able to offer a one-stop solution for all the waste management services a refinery would need.
Medical Waste: A large player in the medical waste industry is Stericycle , which provides a variety of medical waste services to hospitals, health care facilities, doctors' offices, and pharmaceutical companies. Just like Clean Harbors for refinery waste management, Stericycle is able to offer more services to hospitals, which is the main target of the Paragon Waste Solutions unit. For instance, in addition to disposing of medical waste that is collected at hospitals, Stericycle manufactures disposal containers for medical waste like needles, syringes, etc that are placed in hospitals and other health care facilities. Another problem with the medical waste industry is securing new customers because in a recent investor presentation by Stericycle noted, "Over 95% of revenues are under long term contracts." With hospitals and health care facilities having long-term contracts with a market leader like Stericycle, it could potentially be tough for SEER to secure new customers for the waste destruction systems SEER sells through its Paragon unit.
Since the beginning of 2014, SENR has had an average daily volume of 89909. The volume in SENR has been wide ranging this year, on the lowest volume day, SENR traded only 400 shares, however the highest volume day had a volume of 633100, therefore as you can see the stock will barely trade some days, and other days trade at over 7 times the average volume. In addition to having a wide swing in volume, SENR also has wide bid/ask spreads as well. I looked at the current bid/ask spread for SENR on my ThinkorSwim trading platform and it showed a bid of 1.06, and an ask price of 1.19. This is a very wide spread and shows the risk of using a market order if you buy the stock, and because of this wide spread, limit orders should be used.
In closing, I believe Strategic Environmental & Energy Resources is a quality micro-cap stock, which has a core focus of providing products and services for the refining industry across its four subsidiaries. SEER is well positioned to take advantage of increasing oil production and refinery utilization by providing a complete offering of waste management services. In addition, SEER & its Paragon subsidiary are positioned in other industries like medical waste to provide a new disruptive technology that is cost effective and more environmentally friendly for healthcare facilities. With each of the company's subsidiaries posting strong revenues, and Paragon Waste Solutions just starting to generate revenues, SEER is on the verge of profitability. Yes, SEER is a micro-cap stock, however, with its strong growth, a new revenue source coming online, a strong balance sheet, and recent capital funding, SEER has potentially significant long-term value, and I believe shares are worth owning.
Disclosure: I am long SENR. 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.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.