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Carpe Diem: ClearSign Combustion At An Inflection Point

|About: ClearSign Combustion Corp. (CLIR), Includes: ERII

Summary

Breakout signs: There was insider buying in late May, short interest has dropped precipitously, revenue checks are coming in, new contracts are inked, super majors are interested.

Breakout sustainability: CLIR has at least 5 Verticals--refinery heaters, oil recovery steam generators, wellhead flares, industrial boilers and large industrial processes.

CLIR's Duplex technology is now proven and the company's business has expanded geographically from California only to Western Canada, Texas and Oklahoma.

CLIR management may have the opportunity to cut a deal in the boiler space that will avoid future dilution and increase the market cap considerably.

In Dead Poets Society Robin Williams' character quotes Roman poet Horace, telling his young male students Carpe Diem--Seize the Day! Skeptics will quote another famous movie character, Jerry Maguire: "Show me the money." Despite delays in it's first revenue check from a refinery heater in Bakersfield, CA, CLIR has just showed investors a cool million dollars from another vertical--well head flares.

SEATTLE, Aug. 4, 2016 /PRNewswire/ -- ClearSign Combustion Corporation (NASDAQ: CLIR), an emerging provider of industrial combustion technologies that help to reduce emissions and improve efficiency, announced today that they have received a multi-flare contract from a major California oil producer to retrofit their enclosed wellhead ground flares with its Duplex™ technology to ensure compliance with air district emission requirements. This contract, which includes the previously disclosed initial test unit and is through the producer's contractor, Advanced Combustion & Process Controls, Inc. (OTC:ACPC), is valued at over $1,000,000. It is expected to be completed over the next 6 to 12 months depending on the customer's schedule.

ClearSign Logo

This first major order for ClearSign comes as it nears completion of the retrofit of the customer's high output, enclosed ground flare used for flaring wellhead gas which was originally announced in February.

While there are over one million flares associated with production wells in North America, only a small portion of these flares are currently regulated. California currently regulates flare emissions and it is expected that other states will follow over time to comply with the Clean Air Act.

If management can continue to show investors current and future revenue then CLIR's market cap and its share price will likely increase significantly. Will now and the rest of 2016 be the time for ClearSign Combustion and its investors to "seize the day" and capitalize on opportunity or will one's investment "efficiently combust with low NOX?" If one can believe CEO Stephen Pirnatt from the May conference call then more revenue should be coming very soon from the Bakersfield refinery AND from Aera Energy (jointly owned by Exxon and Shell). Duplex has been installed and working at Aera in a Once Through Steam Generator for over 18 months. A second installation is in process and it will bring a revenue check.

Aera energy and ClearSign are both pleased with the performance of the pilot unit. Our subsequent unit purchase is installed and awaiting commissioning. Aera plans to meet with us late in the summer to discuss potential future requirements.

Regarding one of our Bakersfield, California refinery installations we are happy to report that they are satisfied with Duplex performance and have commenced their 30-day testing window to demonstrate final contractual acceptance of the unit. This process started later than we had hoped due to the customers choosing to make additional systems modifications that were completely unrelated to the Duplex retrofit.

Significant good news has been flowing rapidly for the company in recent months. First of all, it became clear with an SEC filing on June 1, 2016 that there had been insider buying of CLIR shares in the last two trading weeks of May by Christopher A. Marlett of MDB Capital. Mr. Marlett is the CEO of MBD Capital, the company that originally financed CLIR in its IPO. After his recent purchases, Marlett now owns 7.5% of company shares.

Secondly, the company indicates that fully half of the super major oil companies will soon be visiting the Aera installation (once through steam generator-OTSG) to see Duplex technology in action. Clearly, the interest in CLIR's Duplex technology is growing rapidly. Of course this makes perfect sense as Duplex is fairly simple to install, the components needed are easy to manufacture (ceramic tile is made of materials that are plentiful and inexpensive) and the technology itself both exceeds the strictest current NOX standards while also making processes more efficient. As CEO Pirnatt has said: "Duplex is a simple yet elegant solution. It is a win for the customer and a win for the environment."

Another bullish sign for the share price is that the short interest has steadily dropped from a peak in September 2015 of nearly 2.1 million shares held short to about 1 million shares since April of 2016.

It should be noted that ClearSign Combustion now has four major verticals which should all be producing revenue within the next 12 months. One of these verticals, wellhead flares actually came to ClearSign unsolicited upon the request of a company which had found out about the Duplex Technology solution and its advantages. CLIR has installed Duplex on 5 of these at about 200K each. With well over a million wellheads in the U.S. and Canada one can get dizzy calculating potential revenue if CLIR installed Duplex on just 1% of the existing wellheads at 150K each. The revenue on this vertical alone would then be significantly above $1 billion. Since the NOX requirements are less stringent for flares (15ppm) and ClearSign received its first revenue check in this vertical, flares could well be the area that takes off most quickly in terms of revenue.

The second vertical is refinery process heaters such as at the Tesoro and the Bakersfield installations. There are 140 refineries in the U.S. alone (700 worldwide) and the average refinery has about 20 process heaters. That makes nearly 3,000 in the U.S. alone and about 14,000 in the world. As noted previously, CLIR will be receiving its first revenue check in short order from this type of installation. Once Tesoro's third party engineers give a positive report on that companies Duplex installation then other companies can make orders with extreme confidence. It's a not so well kept secret that the engineering firm commissioned by Tesoro is from Fluor Corporation.

The third vertical is the Once Through Steam Generator space (OTSG) used in the oil recovery business. The Aera installation is actually the longest operating real world example of Duplex technology working successfully and reliably in a large BTU operation. ClearSign has now been commissioned to install Duplex in a much larger OTSG in the Western Canadian Oil Sands region. OilSands These units are about four times larger than the Aera OTSG and the Canadian Company has 40 of them. When asked on the recent company call how confident he was that Duplex would be in this massive OTSG, CEO Pirnat called it a "slam dunk" and he is not one known to get ahead of himself. He has a reputation for being very conservative and understated in his statements and projections. Many investors who follow ClearSign closely expect a revenue check and another order from Aera Energy within a couple months.

The fourth Duplex vertical is in the commercial boiler space. When asked by this author about this space at the last conference call CEO Pirnat indicated that there are definitely discussions/negotiations happening, but he would not be more specific. He is keeping his cards close to his vest. If the company can ink a good licensing deal with a company like John Zink or Cleaver Brooks then this would another significant catalyst for the share price. If it was a large deal with upfront cash like Energy Recovery (NASDAQ:ERII) inked with Schlumberger (NYSE:SLB), then we could see a very significant share price appreciation. ERII's share price basically tripled in one trading day after that deal was announced. The risk of waiting to invest in CLIR until one sees more revenue and signed deals is that one could miss out on either a large move based on a licensing deal or one could miss out on a buy out offer from a larger company.

This type of deal for CLIR is certainly quite possible as there are millions of commercial boilers worldwide and, according to the company, not only would Duplex make these boilers more efficient while lowering NOX, Duplex would reduce the vertical flame size roughly in half. The reduction of flame size would mean that newly made boilers could be much smaller than current models saving on shipping costs, installation costs and even building costs for new commercial buildings since the boilers would take up roughly 50% less space. ClearSign has recently purchased and retrofitted a commercial boiler in it's Seattle headquarters to demonstrate how effectively Duplex in an "off the shelf" commercial boiler.

There is actually a fifth vertical identified by the company that is yet to be commercialized: the "large industrial sector" which includes plants in the chemical, cement, pulp and paper, metals and large heating processes.

In the recent corporate investor presentation, the company identifies their 10 year U. S. target market for each segment. They estimate up to $826 million in the refinery segment; $124 million in enhanced oil recovery, $802 million in the large industrials, $201 million in the flare segment and $1,723 million in the ICI boiler segment for a total of over $3.4 billion. The timelines the company has projected are as follows: the first half of 2016 "field validation at commercial scale." The second half of 2016: "multiple installations build market confidence." Probably the most important projection is targeted for mid 2017 "commercial acceptance as an industry game changer."

Another important metamorphosis for this young promising company seems to be happening now on the NASDAQ. The shares of the company are slowly transforming from mainly a trading stock to an investment. The short interest has been more than cut in half since September 2015, there has been recent insider buying and the share price is now above $5. If the share price can stay above $5 and stay there then another step in this metamorphosis would be institutional buying and coverage by analysts.

While I find the current Risk Reward quite compelling on the side of reward, do not invest in CLIR unless you have a tolerance for significant volatility. Even though I am quite bullish on CLIR's short term and medium term share price prospects, I do not recommend buying shares as a short term trade. It is simply too risky. If you are an investor who can tolerate owning a moderate to high risk high reward stock for a portion of your portfolio then you will find that CLIR is an excellent choice to own with at least a 1-3 year timeline. If, as I expect, there is a significant share price appreciation within the next six months, then one can always sell a portion of holdings to lock in profits and hedge risk.

In summation, ClearSign Combustion is an exciting young pollution control technology company that has multiple opportunities in at least 5 separate sectors of pollution control. The current management has developed a successful business model that has significantly expanded the possibilities for future contracts and future revenue. Duplex technology itself has been proven to be reliable and very effective in reducing NOX while actually increasing operational efficiencies while lowering future maintenance costs. The potential revenue stream far exceeds the companies current market cap and recent developments and share price movements are quite encouraging. CLIR and its investors are seizing the day. If, after doing your own due diligence you too believe that CLIR's present and future prospects look very promising then I think that right now is an excellent time for you to "seize the day" as well. Carpe Diem.

Disclosure: I am/we are long CLIR, ERII.

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.