I first wrote about Wavefront (OTC:WEESF) [before I started working for them] when the share price was around $1 and moving up quickly. After I started working with Wavefront I made the following statement:
In my capacity as a newsletter writer, I'm exposed to hundreds of companies a year. It is extremely rare to find one with as much groundbreaking potential as Wavefront. My experience and expertise as a petroleum hydrogeologist over the last 20 years gives me a great deal of comfort with the reliability of Wavefront's technology and the science behind it.
To a large degree, I am staking my personal and professional reputation and the ultimate success of my newsletter on Wavefront. I'm not losing sleep over it. Why would I bother sticking my neck out when there are literally thousands of resource based companies out there? What makes this one special?
I'll spare you the breathless "Peak Oil" primer as the theory doesn't account for rising prices and the application of new technologies. We aren't going to run out of oil tomorrow. I believe that human ingenuity and innovation will ultimately keep the petroleum spigot open long enough for the planet to transition to other energy sources. I'll refrain from using the promoter's glossary that includes phrases like "hot stock", "poised to explode" and "buy now!". Wavefront is not a flash in the pan promotion. They have developed a revolutionary fluid flow technology that the marketplace is just becoming aware of.
Improving Oil Recovery
One of the best places to find oil is in already discovered fields. Robert Ryan, vice president of global exploration for Chevron (NYSE:CVX), said as much during a recent American Association of Petroleum Geologists [AAPG] speech. He believes there are 5 areas of "discovery" that will determine the world's energy future including exploration, recovery, renewables, efficiency and talent. Ryan's comments on recovery are of particular interest:
Imagine if you increase recovery by just a few percent -- a few percent the increase can be huge. There's a lot to recover.
In fact, the August 2006 issue of World Oil Magazine reports that in the United States 374 Billion barrels of oil, or approximately 66% of discovered oil remains stranded in reservoirs.
How do we end up leaving so much oil in the ground? If you have you ever tried to squeeze all of the water out of a sponge on the first squeeze, you'll have an appreciation for the challenges of producing oil out of petroleum reservoirs. Primary recovery of oil occurs when a well is initially put into production and the oil flows to surface naturally. This stage of recovery will typically produce 10-20% of the oil in place although it can be as high as 50% of the original oil in place [OOIP].
Secondary recovery occurs after the reservoir pressure declines and the well no longer flows oil to surface. The injection of water [waterflooding] is used to maintain reservoir pressure and to sweep oil from injection wells to production wells. Typical recoveries are 15-45% of OOIP.
Tertiary recovery involves more technically challenging methods such as the injection of steam, chemicals, gases, microbes or heat. It is also called improved oil recovery [IOR] or enhanced oil recovery [EOR]. The fact is that most oilfields are far from being tapped out. Lets look at what the application of new technologies can do to the long term production of a field.
Since the Weyburn field was discovered by Shell (NYSE:RDS.A) in 1955, there was a production peak in 1966 followed by a steady decline. This is very similar to what Hubbert's peak oil theory predicts although the asymmetric nature of the peak reflects the application of waterflooding to keep the oil flowing longer. What is especially interesting is the reversal of the production decline due to vertical infill wells [burgundy], horizontal infill wells [yellow] and CO2 injection [light blue].
The Weyburn field is a great example of how peak oil can be delayed with improved technology and higher prices. Out of the 1.4 billion barrels in place, an incremental 10+% will be produced as a direct result of Encana (NYSE:ECA)'s EOR efforts. Their estimated 144 million barrels of extra production is worth over $10 billion assuming $70 oil prices. A 10% increase in incremental oil recovery is worth a very large fortune indeed. The capital costs of implementing Encana's CO2 include a ~$100 million pipeline to bring CO2 from North Dakota.
Wavefront expects that Powerwave will rescue 10% or more of trapped oil in mature reservoirs. This is not an idle boast. Wavefront's technical team can model how the Powerwave process will perform in a specific reservoir. There have been over 100 successful field applications of the process. Capital costs of deploying Powerwave are several orders of magnitude less than initiating a CO2 flood.
Encana has recently entered into a pre-commercialization agreement with Wavefront on an active water flood in Western Canada. At this time the the exact location of Encana's field has been kept secret. Of course Encana isn't the only company that Wavefront has talked to and several more announcements with major producers are pending. [NOTE: since this article was published Wavefront added Pengrowth to their client list].
It is clear that oil companies have all kinds of technologies that can squeeze extra oil out of the ground. What does Wavefront do that is so special besides offer a lower capital cost to deploy?
Water flooding is the major method of getting extra oil out of the ground and many improved oil recovery methods rely on the injection of various liquids. The bane of these methods is a phenomenon called viscous fingering. In a perfect world the injection of a liquid would create a piston-like displacement of the remaining oil in place. What actually happens is the non-ideal situation where "fingers" of water bypass the oil.
The degree of viscous fingering or water channeling is directly correlated to waterflood performance. - Alberta Research Council 2005
There is less viscous fingering when Wavefront's Powerwave process is implemented. This leads to greater contact and distribution of injected liquids, as well as accelerated oil recovery. Injection rates typically increase by 2-5 times without increasing reservoir pressure. Permanent oilfield applications of the Powerwave process include water flood injection wells and water disposal wells.
The Powerwave process is not restricted to permanent installations. There are numerous well intervention scenarios that require the placement of remedial fluids. The injection of these fluids may only take a few hours but they can have an enormous impact on a well's productivity. Halliburton (NYSE:HAL) was impressed enough with Wavefront's technology to enter into a licensing agreement. Halliburton uses the process in well stimulations where improvements have been achieved through:
1. Enhancing the results of chemical treatments through deeper placement.
2. Pinpoint placement of chemical treatments without zonal isolation.
3. Creating new flow paths of permeability through a combination of forced fluid injection and pore scale dispersion.
While having a target market that consists of 10% of the oil left in the ground is huge [37 billion barrels of oil times $70/barrel is $2.59 trillion in the USA alone], Wavefront's Primawave injection process is marketed to the environmental sector. This market sees $US 4.5 billion/year spent on the injection of chemicals in the ground to treat contaminants. Wavefront has done successful projects for NASA and recently announced a project at Vandenberg Airforce Base in California.
Based on previous positive results of Primawave where fluids have been injected with pin-point accuracy, up to five times faster and with ten times the distribution distance compared to traditional injection approaches, the client has systematically identified the process as the only alternative to successfully introduce the remedial fluids into the subsurface to meet its targeted goals.
The table in the next column shows results from an light non-aqueous phase liquid or LNAPL [LNAPLs are also known as "floaters" - like oil on water] cleanup project in Ontario, Canada.
The Primawave process removes more contaminants in less time in environmental applications. These results represent an order of magnitude improvement.
I find it telling when a bright technical person leaves a secure position to work at a smaller company. Wavefront's Vice President of Operations and Business Development, John Warren, left a position with Halliburton to work with Wavefront. Toiling away in relative obscurity are a team of Ph.D. physicists that have developed predictive reservoir models that allow Wavefront to determine the expected outcomes of Powerwave and Primawave implementations. Apart from their world-class technical expertise, Wavefront's management has serious depth as these bios show:
President, CEO, Director
Brett Davidson heads the Wavefront team and has more than 19 years of experience in research, development and commercialization of products and services in the civil, environmental and petroleum disciplines. Davidson, a founder of Wavefront, has spent the past nine years developing the company's strategic direction, focusing extensively on the global commercialization of Wavefront's game-changing technology.
Prior to Wavefront, Davidson was principal of a consulting company, Subterranean Technologies, which concentrated on issues surrounding salt mine and cavern design and closeout. He began his career with Atomic Energy of Canada in Pinawa, Manitoba, and later managed the Geomechanics Research Group at the University of Waterloo.
D. Brad Paterson
CFO and Director
As the CFO for Wavefront, D. Brad Paterson draws on more than 15 years of experience acting as a senior officer and director of publicly listed companies in order to implement the company's strategic financial direction. Paterson's knowledge of management and financial accounting, corporate finance, corporate governance and regulatory markets also plays a significant role in his ability to supervise financial management, control, reporting, planning and investor relations.
Before joining the Wavefront team, Paterson led and consulted in the public listing of private companies, corporate restructurings and financings, business and assets valuations and acquisitions. In addition, he served as a senior financial analyst for a private equity and mezzanine financing firm.
Dennis R. Minano
In his capacity as director, Dennis R. Minano serves as an advisor on energy and environmental issues for Wavefront. He also chairs an energy and transportation group charged with formulating recommendations for future U.S. policy. In this role, Minano builds on his previous work aimed at crafting new public policy through several forums.
Prior to Wavefront, Minano spent 30 years at General Motors Corporation (NYSE:GM), where he started as an attorney involved in marketing, product liability, energy and environmental law. He was then appointed practice area manager of the environmental and energy legal group and served as a vice president for GM Communications, where he helped to integrate communication with business strategy. Minano rounded out his career at GM serving in the capacity of vice president of Energy and Environmental. Recently, Minano was appointed Chair of the Board of IntegriGuard LLC, a private company in the heath care field.
A businessman with more than 30 years of experience in the startup and development of companies, Kazanowski began his career as an automotive designer at Ford Motor Company (NYSE:F). Since then, he has focused on developing his own businesses, which include Cambridge Products – a designer and manufacturer of full-scale product lines for FTD Florists (NASDAQ:FTD)worldwide, Anheuser Busch (NYSE:BUD) and Miller Brewing Company – and Business Television Video Systems, a fully integrated audio/video system for large retailers, restaurant chains and corporations. Kazanowski sits on the Board of Directors, Public Broadcast Services [PBS] in Detroit, Michigan.
Stelmaschuk is well versed in building companies and in the public markets. Prior to joining Wavefront, he served as president, and later, chairman of NQL Drilling Tools Inc. (now NQL Energy Services). Stelmaschuk also served as the president and chairman of National Quick Lube, president of Mr. Lube USA and vice-president of Midland Doherty Ltd.
Steven W. Percy
Before Wavefront, Percy held several positions with The Standard Oil Company, including manager of American flagged marine transportation, manager of the Eastern Crude Oil division, director of operations analysis, director of downstream strategic planning and development and director of the executive office. Following the merger of British Petroleum Company p.l.c. (NYSE:BP) and Standard Oil, Percy served as the group treasurer of BP and chief executive of BP Finance International, president of BP Oil and chairman and chief executive officer of BP America.
It is hard to put a happy face on a stock that has declined from a high of $5.20 to the current price of $1.19. [NOTE: since this article was published Wavefront reached a high of $1.54 and recently closed at $1.38] . Management has endured slurs and blatant character assassination in light of recent share performance. It is important to remember that this stock had a lengthy slide from a $0.65 high to a low of $0.20 before rocketing up to $5.20. The stratospheric rise happened on the back of a series of positive announcements from September 2005 to February 2006. One of the most positive announcements was that Occidental Petroleum (Elk Hills Inc.) (NYSE:OXY) would be using Wavefront's injection process in a California heavy oil field.
Unfortunately, a small competitor, Applied Seismic Research [ASR], sent an email to Occidental in which ASR's president, William Stern, informed Occidental Petroleum that he believed Wavefront was infringing ASR's patents. On February 14, 2006, Wavefront announced a lawsuit against ASR for tortuous interference:
In management's opinion if ASR had not unlawfully interfered, the success of the pilot waterflood project would have resulted in significant revenue to Wavefront for a number of years into the future. Management is optimistic of a favorable outcome as well as the opportunity to renew our project with Occidental of Elk Hills. Wavefront and its licensed providers are moving forward on all fronts with prospective clients and joint venture partners. Management will not allow the actions of ASR to interfere with the execution of the Company's business plan.
ASR had very little cash so collecting damages was not possible. However, the US District Court gave the following judgement [announced on October 17, 2006]:
Wavefront's "Dragonfly" tool, either alone or in combination with any other component or process or manner of use, does not infringe any claim of the ASR patents under any theory of infringement, including but not limited to direct or indirect infringement, and induced or contributory infringement; and, Each of the counterclaims asserted by ASR was dismissed with prejudice.
During the court proceedings Wavefront acquired interests in related patents in order to strengthen its case. While the court action negatively affected Wavefront's business and share price, their patents have been successfully defended in court. Insiders have consistently bought up shares over the last 6 months in spite of their already significant holdings [over 38% of Wavefront's shares are under insider and management influence - see table].
Another shareholder of note is Sprott Asset Management [Canadian Equity, Energy, Hedge Fund LP II, and Bull/Bear RSP]. You should be able to get a position in Wavefront at lower prices than Sprott did. Suffice it to say that this stock is tightly held by insiders and institutions.
I hate being patient. I want to find out about a company, write about it and see my subscribers double their money in a week. I also know that the big money is made in finding a good idea and sticking with it. That is why I am reiterating the Wavefront story. I know that innovative technologies are not adopted overnight. I have personal experience with this and there is considerable research on "social diffusion theory". Early adopters don't grow on trees.
Wavefront Produces Petroleum
Risk taking technical people were generally the first to be sacked during the downturn in the early 1980s. In order to demonstrate the effectiveness of Powerwave, Wavefront's management recognized that it would be advantageous to demonstrate the technology on its own oil fields as well as forming partnerships with forward thinking oil companies. Currently Wavefront has interests in two oil properties: Rogers County, Oklahoma and Rodney South, Ontario. News on production improvements in these fields is pending [NOTE: since this article was published Wavefront acquired mineral rights to 1,679 acres in Young County, Texas].
Wavefront's Future Plans
Continuing the existing royalty-bearing license agreement with Halliburton Energy Services to market Powerwave internationally. Obtaining leasehold rights to mature, under-producing and abandoned oil fields in order to implement Powerwave for oil well stimulation and oil reservoir rejuvenation. Securing a working interest in oil production operations with independent producers in conjunction with the installation of Powerwave. Providing site-specific Powerwave licensing agreements to major oil producers.
Steady revenues that the spreadsheet crowd can model are still a few quarters out. The licensing of Powerwave and Primawave have the potential to create significant revenue streams. Wavefront is an energy technology stock that has the potential to alter the shape of "Hubbert's Peak". It is preferable to accumulate Wavefront on the cheap than to chase it after an announcement. [NOTE: Wavefront's July 31st press release regarding Pengrowth stated the following - Wavefront continues to pursue additional high-profile opportunities and anticipate similar announcements in the coming weeks.]
This excerpt is modified from the August 4th, 2007 Big Picture Speculator Newsletter. www.bigpicturespeculator.com Jim Letourneau, P.Geol.
Disclosure: Jim consults for Wavefront energy and currently owns shares and options.