Contributor Since 2017
I actually started writing about Genoil (OTCPK:GNOLF) a few weeks back. No rush I thought; however the stock has recently been hitting new 52 week highs. Now I just heard that Alvin Bojar, who recently submitted an article to Gumshoe, was contacted (out of the blue) by ex-shareholder and now chief dissenter Tyson Halsey, who insisted that Alvin should retract his analysis about the stock being "naked" shorted as it is "simply not true". This begs the question "Why would anyone who has sold all holdings years ago even care about a penny stock?", unless there is something to it. Tyson published an article in Seeking Alpha back in December 2012. My curiosity has prompted me to read the Gumshoe article and include some of the salient points in my discussion. One thing for sure, Genoil's story is now gaining a lot of attention worldwide, and is being picked up by mainstream media, with the latest being the interview with the CEO which will be airing this April 30th on Fox Business News.
Momentum is definitely building and the need for Genoil's technology has never been so great. While we still haven't agreed on the causes or science behind global warming, no one disputes the contaminating effect that the discharge of exhaust fuels from ships has on both our oceans and inland waterways. The seriousness of man-made water pollution, especially in the form of high sulfur content in fuel, has been recognized for some time. It was first addressed seriously in 1997 by MARPOL (Marine Pollution), the International Convention for the Prevention of Pollution from Ships, when the maximum sulfur content in bunker fuel was limited to 4.5%. This became even more significant, when in October of 2008, MARPOL announced the sulfur content of bunker fuel was being lowered to 3.5%, effective immediately, to be followed by a further reduction to 0.5%, starting in January of 2020. As of that date, all ships will be prohibited from burning any fuel oil with sulfur content in excess of that limit. At the time when the world was focused on peak oil, who knew that the technology Genoil was developing would take direct aim at the Sulfur reduction problem?
Genoil's GHU upgrader essentially is a "souped up" fixed bed reactor, thanks to Genoil's patented blending technology, which brings the costs down far below that of competing technologies. For those still wondering about scalability, it is interesting to note that the challenge has always been to miniaturize a fixed bed reactor design which they achieved at Genoil's upgrading facility in Canada. The first test of the pilot GHU was in Conoco's Kerrobert field, where they conducted a highly successful three-month study, refining Athabasca bitumen. The next significant advancement came in June 2008, when China Petroleum Engineering Company issued a Feasibility Study Report of the Genoil Upgrader. One of the study's goals was to determine the cost of lowering the sulfur level of medium heavy and sour crude to 0.24%, which was of vital importance, as there are 900 billion b/o in recoverable heavy oil reserves worldwide. The results came in at slightly under $3.00 per barrel, or 70% to 77% under competitive processes, giving Genoil a significant advantage over current conventional technology.
The most recent testing of the GHU took place in 2010, when Lukoil flew in 100 barrels of crude from its Yarega oil field to Genoil's upgrading pilot plant in Canada. The results were consistent, and substantiated the claims that the GHU upgrader could desulfurize heavy crude/residual (bunker oil) by a factor of more than 99.5% at a savings of over 60% compared with current technologies. Due to other factors, Lukoil decided not to proceed with the building of a full scale GHU system at that time. However, it is noteworthy that Raushan Telyashev, the General Director of Lukoil's design and research institute, has recently joined Genoil as Vice President for the Middle East and Russia.
The excitement generated by the GHU technology and the cost benefits it offers can be better understood with a look at the numbers. According to MARPOL, total global consumption of maritime fuels in 2014 included 224 million tons of marine heavy fuel oil (HFO) with a 3.5% max sulfur content and 64 million tons of middle distillate oil (MGO), which has a sulfur content of less than 0.15%. By 2020, global demand for fuel with sulfur content not to exceed 0.50% is projected at 272 million tons, of which HFO will constitute 233 million tons, with the remainder comprised of much more expensive MGO, which will be needed to meet ECA (Emission Control Areas) standards of 0.1%. ECA regulations are more strict as they apply to ports and inland waterways, including the 37,000 km extending through 20 countries of the EU and the even larger waterways of China and Russia.
It takes about 6.7+ barrels to equal a ton of heavy or bunker oil. With an expected demand of 233 million tons in 2020, it will require a minimum of 1,500,000,000 annual barrels of desulfurized heavy and residual oil to meet this projected marine demand. There seems to be no disagreement over industry's current inability to meet this requirement. It comes down to cost, and that is where Genoil will shine.
The price of building a GHU unit capable of lowering the sulfur content of 100,000 barrels per day (bpd) of heavy or bunker fuel to meet the fast approaching 0.5% regs is approximately $700,000,000. Contrast this to the 2.2 billion spent by Marathon (MPC) for the Detroit Heavy Oil Upgrade Project (DHOUP) to retrofit to handle an increase from 104,000 to 120,000 bpd. With the GHU refining at a cost of less than $3.00 and also meeting the 0.5% standard, the GHU numbers begin to look even better.
As of March 1, 2017, the average cost of 380 CST bunker fuel was around $290/ton, while the price of middle distillate, or light (MGO) oil was about $489/ton. As just mentioned, the GHU process reduces the sulfur content of CST 380 bunker fuel to the required 0.5% sulfur content at a price of $3.00/barrel or $20.10/ton, which added to the $290 market price stated above, gives a total cost of $310/ton. The current price being paid by shipping lines for bunker oil desulfurization is $10/bbl, which computes to a cost of $357/ton, but in 2020 the shipping lines will need to switch to MGO which costs $489/ton potentially increasing the Genoil margin by $199.00 /ton. When this $47 difference (forget the $199 for now) is applied to the projected annual demand of 233,000,000 tons per year, it presents an absolutely unprecedented opportunity and reason why Lloyds Register in the UK named Genoil the Winner in the "One to Watch" category at the Ship Efficiency Awards that were held on November 2nd of 2016. The 2020 legislation change is considered by industry insiders as the greatest change in shipping since switching from coal to oil.
Recognition is accelerating. It started in October 2014, when Heibei Zhongjie Petroleum signed an agreement for a 1.2 million tons/year refinery, on which they have already expended over $4 million during the first stage of implementation. This was followed, on October 15, 2016, by receipt of a $5 billion LOI for an initial 500,000 b/d upgrading facility for the Middle East, involving a division of Shaanxi Petroleum Group, boasting of assets in excess of $42 billion. The Middle East project is being contemplated to convert 3.5 million bpd at a cost of $35 to $50 billion. Then, on November 16th, a $50 billion LOI was signed to cover the development of oil fields and refineries in Chechnya and Russia, with the oil to be processed with the company's GHU fixed bed reactors and the refined light oil then shipped to China via pipeline.
Interest for maritime application continues to grow. Just last month, on February 13th, Genoil announced it had signed an MOU with the Bomin Group, one of the world's leading independent suppliers of marine fuel, with over 40 years of experience, for the distribution of refined low sulfur oil for marine use. Now in March 2017, came the significant announcement that Douglas Phillips, former Chairman and CEO of WeiserMazars LLP, joined Genoil as a special strategic advisor for the execution of deals and to provide oversight to the company.
With all of this going on, what is so inconceivable and incomprehensible is that the share price of Genoil is currently sitting around $0.09. But let's look at some key factors. For the last 3 years the average daily volume was around 60,000 shs. The day Raushan was hired, the shares traded spiked to 2.4 million. For the first half of March, the daily trading volume averaged around 360,000 shs, yet the price only moved marginally higher. At first it seems to make no sense, however, many suggest that the stock is being shorted along with a basket of other companies. That aside, with a little scratching below the surface a realization emerges that the company is actually much stronger than its peers.
Ivanhoe Energy was one of its peers backed by billionaire Robert Friedland. Not long ago they seemed promising on the surface with solid backing. However, if you Google it now, one of the first words that comes up is bankruptcy. Granted, the 2008 crash was devastating to many, and it made a few very rich if they were on the "short" end. It was tough all around, but especially tough on the penny stocks. Under increased regulations, market nervousness and an inane "zero risk" mentality in the investment world, penny stocks continue to face challenges. If a startup manages to win over some investors, the "shorts" are always waiting to crush them. If you think about it, this is how the "shorts" not only make a living, but also control this segment of the market. They don't have to win all the time, just the majority of the time. They don't care about great ideas or saving the world. It's all about making money to them. Like global warming, shorting is everywhere, even if we don't fully understand it, it is part of all markets, but especially true of the OTC.
When I think about it, Genoil has made a miraculous recovery in this environment. New management had slashed expenses and eliminated all 3rd party debt, while at the same time reestablishing and building relationships. This actually may be the most underappreciated and undervalued aspect of the company. You hear all the time about companies going under and someone saying "that was a good idea". It takes more than a good idea, it takes great relationships. Genoil has fully tapped into that concept as evident from the solid relationship with Heibei Zhongjie Petroleum and the Chinese Policy "Superbank" standing behind them. These relationships are built on the foundation of honesty and trust. This confidence in Genoil and its management has been demonstrated into its ability to continue to raise operating capital while at the same time moving up its share price. However, as the price increases, typically some investors will reduce holdings, and as with most penny stocks, the shorts will seize the opportunity to respond with increased pressure. But this can't go on forever, and I believe we are on the cusp of a major rally.
Remember, the shorts are so successful in today's overregulated environment that they don't even care about the details. Like our political parties, which lobby for support of regulations that inhibit growth and opportunity, and engage in smear campaigns, endless litigations, fabrication of lies and hyperbolized half-truths, they do it all with total disregard to what is really happening in the company. When they see the profits, they consider their campaign to be a success and don't change course. However, they don't bother to acknowledge the overwhelming interest and excitement in companies they seek to destroy.
Years ago short selling was permitted, but only if you could borrow the shares to cover your short position. However, gradually over the years, the concept of investing changed. With the advent of derivative trading, hedge funds and yes, naked shorting, the emphasis on Wall Street changed from productivity to profitability. Naked shorting, which permits selling a company's stock short, without having to have the ability to cover your short position, led to major abuses. Now, stock scavengers scour the horizon for small companies, whose stock is rising briskly, but without major backing. The shorters descend and begin massive selling, driving the price of the shares down drastically, until often the companies are driven out of business for lack of ability to raise funds, which in the normal course of events they would be able to do. Many have claimed this has provided an opening for many questionable interests, including the mafia, to grossly enrich themselves, while providing no economic benefit to the country. The former Undersecretary of Commerce for Economic Affairs claims naked shorting has cost investors $100 billion, and has driven thousands of companies into the ground.
This was recognized by Congress, which passed legislation in 2008 banning abusive naked shorting. The key word here is 'abusive', for there are admittedly sound economic bases for allowing naked shorting in the normal course of trading. To the best of my knowledge, the SEC has never moved against any of the major abusive short sellers. I called them three times on this matter and never received a reply. If they didn't move when they first received word of problems regarding Bernie Madoff, what chance do you think the microcaps have?
Small companies really have to make it on their own merit. Most fund managers have policies not to invest in one thing or another, be it no revenue generators, under $2.00, or not on a major exchange. Shorts are the polar opposite. Either way, this company is way underexposed and presents the opportunity of a lifetime to the average investor. All it takes is the signing of a contract and the share price would go through the roof. There are many ways this can be done without requiring additional cash outlay or dilution, opportunities made possible by Genoil's transition from a technology company to general contractor with one of the world's largest "Superbanks" behind it. The right connections, financial backing, and a technology guarantee from Beijing Petrochemical is the perfect combination to propel the company to the finish line.
Are the short sellers putting pressure on Genoil, offering hundreds of thousands, or at times even a million or more shares per day, while the price remains constant? We have to wonder who is on the other side of the transaction. It might very well be the Chinese, or, as I believe, the Russians. There's also talk that the Chinese may be thinking of making an offer for the company. As Genoil continues to strengthen, the argument of whether or not the shorts are holding the share price down will either become a moot point or turn into the most talked about short squeezes in all of history.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.