Divergent Energy Services’ (TSXV: DVG) Pump Could Change the Way ‘Tight Oil’ is Recovered

Dave Hammond | Optimac.ca Divergent Energy Services Corp.’s (TSXV: DVG) primary growth driver is its exclusive rights to market a linear submersible reciprocating pump that is propelled by permanent incased magnets, which can be used for tight oil recovery. It replaces similarly priced ancient technology, the conventional beam pump (pump jack and rod strings), which has been prone to breaking down due to directional drilling complexity.

Divergent Energy Services Corp. (TSXV: DVG) is a Calgary based energy services company that has been operating for nearly 10 years in Canada, USA, and Mexico. DVG’s primary growth driver and the basis of this report is the Company’s exclusive rights to market a linear submersible reciprocating pump that is propelled by permanent incased magnets (Linear Electro-Magnetic Submersible Pump, “LEMSP”). This down hole ‘motor and pump’ forms a complete system that duplicates rod pump movement and can be used for tight oil recovery, replacing similarly priced ancient technology, the conventional beam pump (pump jack and rod strings). While the rise of unconventional drilling has unlocked vast quantities of previously uneconomic tight oil, rod string failures (and thereby maintenance costs) are increasing due to directional drilling complexity, opening the door for artificial lift innovation.

DVG’s 1st commercial Linear Electro-Magnetic Submersible Pump (Gen-2 model) was deployed on Jan 22nd in SE Saskatchewan without incident and has since been operating continuously. Currently running like a Swiss Watch and producing ~120 b/d of fluids. DVG and the partner will monitor the well and are aiming to provide an update following 90 days of steady state run-time.

We’re not out of the woods yet but this is a huge positive. Our official ‘game on’ comes when we see meaningful sales, which is likely to follow an unknown duration of steady state run-time on at least a few pumps. We think 3-6 months of hitch-free run time is probably needed before we start to realistically anticipate progress on the PO-front. In our base case scenario, we model 30 pumps sold in ‘16E; to achieve this we’ll need to see developments by around end of Q3/16E.

We expect DVG will take delivery of additional pumps in the coming 60 days (up to 10 are inbound, 6 likely headed to SE Sask., and 4 to Wyoming), and we suspect efforts are well underway to secure additional business, perhaps a producer in the Wyoming area.

While this motor is already being used in China, DVG is the first to market it here, and is potentially turning the corner toward a broadly accepted technological success. Given the vast market potential, minimal competition, and current weakness in the stock (which we attribute to general aversion to CAD small cap and E&P related equities), we believe this is a very compelling opportunity.

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