Water Gleaner Stocks: Value In Sludge

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by Debra Fiakas CFA

There are well over 3,000 companies around the world that are involved in some element of wastewater treatment, providing a broad mix of technology, equipment or engineering services to generators and collectors of fouled water.  A small group in this wide field is gaining visibility  –  the ‘water gleaners.’  Like the peasant women picking up stray grains of wheat left behind in the empty field of Millets famous painting, some see value in effluents, sewage and run-off.  In this post we look at three small-companies with novel technologies to harvest water.

New Sky Energy is a private company based in Boulder, Colorado, has developed several waste recycling processes, including carbon dioxide capture, sour natural gas sweetening.  The company’s ‘SaltCycle’ process converts industrial and agricultural brines into useful chemicals that have economic value.  It is an appealing alternative to having to pay for disposal.

The SaltCycle process involves two steps.  In the first step brines are concentrated and purified to produce useful salts such as sodium chloride or sodium sulfate.  Then in step two, the salts are put into a chemical or electrochemical reactor to produce acid, base and sulfate.  Soda ash or bicarbonate can be produced from the base.  Sales of the end products can be used to pay for upstream water treatment or as a power source for the SaltCycle reactor.

 New Sky has focused on the water waste streams of the oil and gas industry.  However, the company has also been calling on mining companies, landfill operations, agriculture, and other manufacturers.  One element that helps the New Sky pitch is the scalability of its systems and the availability of engineering services to help optimize operations. Patents protect the technology behind its three primary waste converting systems.

With all that going for New Sky Energy, there is little for investors.  Management holds its cards fairly close to the corporate vest, making only a few customer announcements and saying little about partners or investors.  Still New Sky Energy is an interesting company to watch for future developments in this expanding market for sustainable industrial processes.

MagneGas Corporaton (MNGA:  Nasdaq) has been a topic of past articles.  The November 2015 post outlined how the company is using its plasma arc technology to gasify carbon-rich liquids such as municipal wastewater to produce hydrogen gas.  The company markets the gas for industrial applications such as metal cutting.  It widely seen as a replacement for acetylene and has been adopted by fire departments emergency situations requiring safer metal cutting tools.  MagneGas2 is being used by two subcontractors in the expansion of the Vehicle Assembly Building at NASA’s Kennedy Space Center.    Most recently the company received an order from a major gas company in Mexico for industrial metal cutting.

As a public company MagneGas provides investors a pure play on wastewater reclamation and reuse.  Unfortunately, ‘industrial sustainability’ is also a ‘small play.’  In the twelve months ending December 2015, the company reported $2.3 million in total sales, resulting in a net loss of $8.8 million.  MagneGas is also still using cash resources to support operations  –  $5.6 million in that same twelve-month period.  With only $2.2 million in cash remaining in the bank at the end of December 2015, a ramp in sales cannot come fast enough for MagneGas.

OriginClear (OOIL:  OTC) was the focus of an October 2015 post.  The company has developed an ‘electro water separation’ process that uses electricity to collect oil and suspended solids in waste water.  The solids are removed with ‘advanced oxidation’ to return clean, decontaminated water back to the industrial system.  OriginClear markets its system has application in settings where oil contaminates water such as in hydraulic fracturing of oil and gas wells.  However, it also has application in the production of algae for fish feed.  Both industries are large water users and benefit from being able to recycle and reuse water rather than having to pay for both water replenishment and wastewater disposal.

Through the acquisition of Progressive Water Treatment based in Dallas, Texas, OriginClear took its first step in the reclamation of foul water.  Progressive brought with it a portfolio of water treatment systems for municipal and industrial waters using reverse osmosis technologies.  More recently the company launched a joint venture with a Malaysian engineering firm, Osmocell Malaysia, which has successfully deployed twenty filtration and reverse osmosis systems for water purification.  The joint venture claims over $1.0 million in proposals and bids in its business pipeline.  Malaysia is the world center for rubber glove manufacturing, which uses water-intensive processes that leave organics and ammonia in process water. 

OriginClear has yet to record significant revenue and still requires cash resources to support operations.  Consequently, its stock is priced in the pennies as an option on management’s ability to conserve cash resources long enough to get the revenue pump primed and generating higher numbers at the top-line.  Cash totaled $695,295 at the end of December 2015.  With a cash usage rate near $250,000 per month, there is some concern about how long OriginClear can last without a dramatic increase in revenue.  That said, the company did have $1.0 million in contracts receivable on the balance sheet, so collections could save the day.  Furthermore, the Progressive Water Treatment operation acquired in October 2015, is expect to add $6.5 million to the top-line in 2016.  

Management of OriginClear is also actively in the hunt for additional acquisition and joint venture partners.  While we expect that large group of over 3,000 companies to consolidate, it is tough to see OriginClear, with it barebones balance sheet, as a consolidator.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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