Small Cap, Big Upside
Little noticed amid the market wreckage, Wavefront’s potentially disruptive oilwell stimulation technology continues to prove itself
by Fabrice Taylor
A funny thing happens when an earthquake hits Alaska. Oil production in the Western Canadian Sedimentary Basin increases.
Scientists have tried for years to understand how and why this happens. By and large, they’ve failed, despite lots of money and effort spent trying to solve the problem. After all, everyone wants to increase production from an oilfield, not to mention reserves.
One Edmonton-based company, however, thinks it’s figured it out, and the evidence so far is pretty compelling: oil producers testing its technology are spending less to produce more oil and increasing their reserves. If the company, Wavefront Technology Solutions Inc. (TSXV:WEE), can get commercial traction, it should be able to make investors serious coin as oilfields deplete and prices rise.
New oilfields are typically under pressure, so when you drill a well the oil comes out on its own. Over time, though, the field tires, the pressure drops and the oil has to be pumped out. Later on, producers have to coax the oil out different ways, such as pumping water through the field to “push” the oil droplets trapped in rock toward the wells.
The trouble with these water floods is they like to take the path of least resistance. When you pump water through rock you want to “sweep” the formation evenly to get at all the oil. But water tends to run along one favoured path, stranding as much as 65% of oil in place in the nooks and crannies of reservoirs.
Wavefront’s brainstorm is to pulse the water at a frequency (like an earth tremor might do) tailored to the formation. Rather than just pumping water at a steady rate, producers attach a Wavefront gizmo to the business end of the injection well and pump the water like a heart pumps blood. The result, in theory, is a more even sweep and more oil production. The idea has been borne out in labs. It’s now proving itself in the field.
Wavefront has been conducting a field test with a big Canadian producer (my guess is EnCana Corporation) in the Wainwright area of east-central Alberta for about a year and a half. The crude is on the heavy side and the results are extremely impressive. There are 17 producing wells involved, and before the tests their production was declining at 3.4% a month. They’re now declining at 1% per month.
What’s more, they’ve produced an extra 34,000 barrels of oil since the project started, and counting. At its peak, the extra production reached 80% more oil per day than the original decline rate suggested for that point.
An added benefit to the Powerwave system, as Wavefront calls it, is that it can cost less than existing water-flood techniques because it uses less pressure, meaning less electricity. That wasn’t the case with the Wainwright producer because it chose to leave the pressure constant, but the net financial benefits are in excess of $1.2 million – for just 17 wells.
Other test pilots have shown similar success. A CO2 flood in Mississippi produced a 27% increase in injectivity (higher injectivity equates to higher production). That’s a big increase for CO2 flooding. Some water-flood clients report sixfold increases from Wavefront’s technology.
Wavefront’s technology also works for environmental cleanup in much the same way as it works in oilfields, the difference being that rather than sweeping oil it sweeps pollutants out of the earth. Again, pilot projects are producing very good results.
In terms of financials, if and when Powerwave commercializes in volume, it should be a good business. There are roughly 200,000 injection wells in North America, and that number is going up (Wavefront’s innovation works with water, CO2, polymers and surfactants as well).
Oil prices are rising with depletion. These related facts are the company’s friends. And its business model is simple: the mechanical units cost $5,800 to make and are rented out for $3,000 a month. Installation costs are about $5,000 (electrical units are more expensive to build and install). Gross margins, if those numbers prevail, will be very fat indeed.
Management and directors – I spoke to CEO Brett Davidson and director Walter Stelmaschuk, former president of NQL Drilling, for this column – are big owners, with about 30% of the shares. And two recent employees came from company customers; they were so impressed with the technology they left their secure jobs to join the startup, a good sign.
The stock is weak, partly because it’s a small cap with little revenue and no profits yet, but also because a big shareholding hedge fund has been dumping it to pay redemptions on its fund. The company’s biggest challenge will be convincing the industry that it’s worth trying – “overcoming the status quo,” as Davidson puts it. The oilpatch can be hidebound and focused on new discoveries rather than optimizing existing ones. But given that Powerwave holds the potential to increase reserves from existing properties (meaning no exploration or acquisition costs), if and when it’s proven out thoroughly, the status quo will be overcome. It has to. “Any oil company interested in maximizing asset value must seriously consider Powerwave in their flooding strategies,” Davidson asserts.
If he’s right, Wavefront’s stock is a no-brainer.
Fabrice Taylor is the Prairie Trader. He is an award-winning journalist and equity analyst.
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