The phrase "do the math" has been in the news recently. Many ClearSign Combustion's (NASDAQ:CLIR) longs will be feeling the burn when I illustrate how math and logic lead to the likelihood that a much larger company will be buying out CLR in the near future. Some will feel the burn of excitement to have one of their investments more than double. Other CLIR longs will feel the burn of disappointment that a company they wanted to watch go from a tiny market cap (below $55 million a couple months ago) into a company they expect will go above $1 billion would not be able to participate in this metamorphosis in the case of a buyout. Most CLIR investors will have a mixture of the two emotions.
The first piece of math is that, even after a recent rise in the share price from $4 to about $5, the market cap of the company remains below $70 million, which makes it indisputably a very small company. In the rest of the article, I will show that there are large companies that will likely need to spend millions of dollars to ClearSign for Duplex Technology. It would be logical for one of these companies to simply buy out the entire company, keeping the current technology and business team in place to further develop and monetize its technologies to benefit the purchasing company.
Here is a straightforward example, and it is fresh off recent news: On April 4, 2016, CLIR was awarded its first contract with a major oil sands producer "to design and engineer Duplex Technology for its oil field once-through steam generators (OTSGs)." If you read the entire press release, you discover that the unnamed Canadian company has about 40 very large OTSGs that average being four times larger than the median U.S. unit. The much larger steam generators are needed to process the heavy and very thick (viscous) oil deposits in this region. While there are steps ahead to a final order for 40 OTSGs, CLIR CEO Stephen Pirnat called the likelihood that Duplex would work on this much larger scale a "slam dunk." Logically, this Canadian company is hopeful that Duplex will work as well as it has at Aera and elsewhere. It is looking for a solution for pollution control and efficiency improvement that Duplex offers. If Duplex works as hoped, the company will retrofit all of its OTSGs.
Now, let's do some math in the case that Duplex works in Western Canada and an order executes for 40 large OTSGs. Given the much larger size (250 MM Btu/hr), the cost of each installation would be approximately $500,000 based on CLIR management's previous statements. 40 units multiplied by $500K equals $20 million of revenue. Given that even after its biggest rally in recent months, CLIR's market cap is about $70 million, the Canadian company must consider the current and future financial sense of simply buying the entire company, thereby saving the $20 million expense and capitalizing on ClearSign's growing current book of business and its extraordinary future prospects.
The Canadian company would likely need to offer something like $210 million in stock and cash to buy CLIR at $15 per share. Furthermore, the current scientific and business team at CLIR would continue its current jobs with raises and bonus incentives for management.
If you are skeptical about all the unknowns related to this Canadian oil sands company and its deal with CLIR, then very recent news from Marathon Petroleum (NYSE:MPC) proves my point compellingly; here is the news summary on Seeking Alpha from 6/9/13:
Marathon Petroleum agrees to spend ~$334M to reduce pollution at refineries in five states and pay a $326K civil penalty, the U.S. Justice Department and Environmental Protection Agency said today.
The agencies said MPC will spend $319M to install state-of-the-art flare gas recovery systems and $15.5M on projects to reduce air pollution at three facilities.
MPC says the investments began in late 2013 and effectively will be completed by the end of 2018, and that ~$238M of the projected spending will have occurred by the end of this year.
Let's "do the math" and it's pretty obvious. Marathon has to spend $238 million for pollution control by the end of 2016. ClearSign has the most affordable and efficient solution for MPC with its Duplex Technology. The market cap of CLIR is approximately $70 million. It would be logical for MPC to simply spend something like $238 million to purchase ClearSign Combustion and all of its assets and get its solution to most of its emissions control problems for free.
There are many other large companies that are now quite familiar with ClearSign's Duplex Technology and its prospects. Aera Energy with the two Duplex installations (one the longest running) is a joint venture between Exxon (NYSE:XOM) and Shell (NYSE:RDS.A) (NYSE:RDS.B). Tesoro (NYSE:TSO) has field tested Duplex now for over six months, and Fluor's (NYSE:FLR) engineers are evaluating the performance. CEO Stephen Pirnat stated in the early May quarterly conference call that fully half of the super majors in oil would be visiting the Aera operation sometime within the month. All of these large companies can "do the math" and will find conclusions similar to Marathon Petroleum. It only takes one company to reach the conclusion that they would like to purchase ClearSign Combustion. Each company has the means.
Of course, the shareholders would have to approve a buyout. I'm assuming an offer of approximately $15 per share, which would be a triple for investors at the current share price. Large shareholders like Christopher A. Marlett of MDB Capital, who owns 7.5% of the company (988,697 shares), and the BD & DBG Living Trust, which has 603,324 shares, would likely love to lock in a triple and might even be willing to consider a lower buyout price as would many small investors. If the company buying ClearSign offered its current management team (many who also own over 100,000 shares) a sweet deal with job security, pay raises, stock incentives so that they could continue to develop and market Duplex and ECC technology, then a triple in the share price would be quite attractive. They can all do the math.
There are two fairly compelling arguments that can be made against a buyout of ClearSign. The first is that many large companies are quite conservative in regards to making such an offer. ClearSign's Duplex Technology has been verified at Aera and a couple other locations, but it is a very new commercial application. Secondly, some large shareholders can "do the math" in terms of the commercial potential of Duplex alone. For instance, if ClearSign captured just 1% of the 1.4 million wellhead flare market in the U.S. at a mean installation price of $150K, then the company would have a market cap of $1 billion with this vertical alone.
Do your own due diligence, but in my opinion, now is a great time to either take a position in ClearSign Combustion or add to one's current holdings. The current odds of a buyout are significant. I believe that these odds will drop if and when the share price appreciates significantly. If there is no buyout, then there are many near-term catalysts as CLIR has consistently added to its book of business over the past nine months. There should be revenue checks coming in very soon from the Bakersfield Refinery and then within several weeks or maybe a couple months from both Aera and Tesoro. If further orders come in from all of these companies (which I believe is likely), then significant revenue is on the horizon and the market cap will expand. Another major catalyst that could come at any time would be a licensing agreement with a large boiler manufacturer, such as Honeywell (NYSE:HON) or Cleaver-Brooks. CLIR's management has been working on such a deal since 2014, and the successes of Duplex make such a deal much more likely.
Potential investors need to understand that this is a young microcap company that has been burning rather than earning cash for the past eight years. While current deals indicate that this should be changing very soon, any delays regarding revenue and/or future business orders could be a headwind on the share price. At the current cash burn rate, the company would be out of cash in February of 2017. Of course, incoming revenue could significantly extend that time frame. Here are the most recent numbers from CFO James Harmon:
We incurred a loss of $2,589,000 in the first quarter of 2016 as compared to a loss of $1,583,000 for the same period of 2015 and a loss of $2,558,000 for the quarter ended December 31, 2015.
The increased loss was primarily due to our increased field testing and development efforts related to our Duplex Technology, including the 60% increase in field and R&D headcount to 15 full-time employees. As to our cash resources, we had about $7.9 million of cash at the end of the quarter. We project that we have about four quarters of cash on hand based on our current rate of usage.
We currently have eight field test projects that we have announced regarding our Duplex technology. Three related to OTSGs in the enhanced oil recovery industry, one related to Wellhead Enclosed Flares and four related to process heaters in the oil refining industry. Four of these projects are in a design phase and four are in the field work stage.
In summary, when one does the math, the current tiny market cap and significant and growing book of business and potential future business opportunities make ClearSign a very attractive takeover target. However, with every penny the share price appreciates, the odds of such a takeover drop.
Disclosure: I am/we are long CLIR.
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.
Additional disclosure: I have more than doubled my position in ClearSign Combustion (CLIR) in the past month and it is more than 10% of my portfolio presently.
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