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.

SciVacDivergent 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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Investment Highlights Key Catalysts
  • Operating business is performing well – Conventional ESP business in USA is driving current run-rate rev $5M to $6M; Q4/’15E was a record quarter; provides a solid footprint in Wyoming to launch the LEMSP
  • Ops update – the 1st commercial version LEMSP is now being installed and we should see an update any day followed by ops update(s) re. performance of the Gen-2 model in Feb/Mar; steady state run time would signal a ‘technological success’
  • For now little competition –  A handful of Co.’s are developing downhole magnet motor technology to replace the all too common pump jack; thus far zero interference while marketing the product
  • Additional units on the way – up to 10 Gen-2 units are being manufactured in this 1st production run; 6 headed to Sask., and 4 to Wyoming; we should see periodic updates in Q1/Q2
  • Very strong tech partner and licensor Han’s Motor (China) –  robotics &  motor expert, Han’s is the manufacturer and has been developing this tech for 10 years; both parties very committed to refining and commercializing the product
  • Follow-on purchase order(s) and/or customer #2 – DVG thus far is working with one client; on success of the initial units we could see a PO from the partner and/or customer #2; either would signal ‘game on’; ‘16E
  • Prototype testing in ’15 lead to the Gen-2 model now being deployed – E&P pilot-partner tested the prototype in early ‘15 and gave the nod to produce commercial grade units (modified, more powerful, improved performance & efficiency); 1st run of ~10 units is underway
  • Another product launch that incorporates magnet tech – DVG is exploring a new Electro-Magnetic Submersible Progressive Cavity Pump, which could revolutionize cold flow heavy oil recovery; an even larger opportunity; possible updates ~H2/’16E
Forecasts

2014

2015E

2016E

2017E

2018E

LEMSP Units Sold

0

1

30

120

300

Revenue ($mm)

6.1

5.2

8.7

20.0

42.5

EBITDA ($mm)

(1.4)

(4.3)

0.0

1.9

6.4

Net income ($mm)

(5.7)

(5.0)

(0.8)

1.1

5.6

FD EPS

($0.06)

($0.04)

($0.01)

$0.01

$0.04

CFPS

($0.00)

($0.01)

$0.00

$0.00

$0.02

Valuation
EV/EBITDA

n/m

n/m

n/m

12.3x

3.7x

P/E

n/m

n/m

n/m

24.4x

4.8x

All financial data in USD; All market data in CAD; CAD:USD 1.40 used for valuation

 

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