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Felix Pinhasov
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Part-time investor particularly interested in resource companies.
  • Canadian Oil Recovery And Remediation Provides A Near Term Transformational Catalyst  4 comments
    Feb 27, 2012 9:27 AM

    Generally speaking, the macro environment needs to be positive, or at least provide a level of certainty for stocks to gain traction as more risk appetite draws investors away from bonds and cash. With the current uncertainty, it is vital to pick stocks with value creating catalysts in the near term, now more than ever.

    Canadian Oil Recovery and Remediation Enterprises Ltd. (NYSEMKT:CVR) specialize in remediating oil-contaminated soil with its Advanced Recovery Equipment Systems (NYSE:ARES). The company's operations are mainly based in the Middle East, the Mecca of oil drilling.

    The company is thinly traded on the TSX Venture Exchange primarily due to its small public float. Approximately 80% of the company is owned by insiders (40%) and Al-Najah Advanced Technology (40%), a Saudi Arabian firm. The small public float enhances moves to the up/down side and therefore, creates extreme volatility. However, this is the case with many small-cap stocks that entail liquidity risk.

    Background

    In the summer of 1990 the Iraqi army invaded Kuwait, which was followed by several months of occupation. In early 1991 a U.S. led coalition began an operation to liberate Kuwait, which lasted about a month. As the Iraqi army retreated, it also destroyed about 800 oil wells along the way, resulting in the formation of hundreds of oil lakes covering about 120 square kilometers.

    Although soil remediation services are needed everywhere drilling for oil takes place, the focus here is on this truly massive environmental disaster. The United Nations War Reparations Fund will pay Kuwait about $3.5 billion to cover the costs to clean and treat the vast area covered with the oil lakes.

    The seed contracts

    The administration of the funds and the clean-up responsibility falls with the Kuwait Oil Company (KOC), which issued the first-stage oil remediation contract tenders in April 2011 with more than $200 million in value. Out of the 31 companies that have pre-qualified, 12 bidders were selected for the seed contracts bidding stage.

    Although each company can bid for the three contracts, each bidder is eligible to win only one contract. Bidders are evaluated based on price, technology, effectiveness and other metrics.

    Through its partnership with SAR (45%), a Norwegian oil and industrial waste management company, CVR (45%) is one of the leading bidders for one of the contracts with an approximate value of $90 million. To put it in perspective, the company's market capitalization is currently about $42 million. The remaining 10% ownership in the partnership is held by a private investment company.

    According to the company, the seed contracts are a pre-cursor to the oil lakes remediation contracts, that is, the window to the $3.5 billion awarded to Kuwait by the United Nations for the clean-up. Therefore, if the company is going to be awarded one of the contracts, the potential appreciation of the stock could be very significant as it opens the company to material value creation.

    This is a high risk-high reward binary event:

    Pros

    Cons

      

    * KOC inquired with CVR twice since the bid submission for further clarification on specific items in the bid documents.

    * CVR is not in the top 3 lowest bidders (such as GS Engineering)

      

    * CVR has the ARES I facility in Kuwait, which was tested and proven to clean soil, exceeding international standards of 1% of remaining oil content.

    * Due to the transformational extent of this event and tight liquidity of the shares, the stock will experience material decline if CVR is going to lose to another bidder.

      

    * CVR is bidding for other contracts (although not the same size) in Saudi Arabia, Jordan and other countries.

     
     
     
      

    * CVR has a major investor (Al-Najah Advanced Technology ) with deep pockets and long reaching connections.

     
     
     
      

    The company recently released an update on the bidding process indicating it intends to extend its bid for the contract KOC inquired about from January 3, 2012 to March 3, 2012. The contract is estimated to have a value of about $90 million.

    The CVR-SAR partnership also recently signed a contract with BP Plc to clean and treat drill cuttings in Jordan.

    Disclosure: I am long OTC:RCVY.

    Additional disclosure: I have a long position in CVR on the TSX venture

    Themes: Oil Gas, Middle East
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Comments (4)
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  • StockMonk
    , contributor
    Comment (1) | Send Message
     
    Your con of "CVR is not in the top 3 lowest bidders (such as GS Engineering)" is...in my opinion...not material. It's not KOC money, right? It's UN money. I'd think KOC would favor who does the job the best.
    27 Feb 2012, 03:47 PM Reply Like
  • Felix Pinhasov
    , contributor
    Comments (70) | Send Message
     
    Author’s reply » They lost to another bidder due to the cost....UN money or not, its still money.
    28 Feb 2012, 11:55 AM Reply Like
  • Felix Pinhasov
    , contributor
    Comments (70) | Send Message
     
    Author’s reply » Cost is one factor. As I mentioned, technology and effectiveness are as important as cost. I own the company for the reasons outlined in the article, so we are on the same page. But to ignore the associated risks is not my style of investing.

     

    CVR was recently selected as a TSX Venture Top 50 company in the clean technology sector:
    http://bit.ly/z7vn5N
    27 Feb 2012, 04:14 PM Reply Like
  • Shahar12
    , contributor
    Comments (3) | Send Message
     
    Longing for sure,

     

    thanks Felix!
    27 Feb 2012, 09:26 PM Reply Like
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