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Jim Letourneau's Blog

Investing, Technology, Travel, Geology, Music, Golf. I think that covers it.

Interview with David Pescod

AN INTERVIEW WITH JIM LETOURNEAU EDITOR, THE BIG PICTURE SPECULATOR

We are here with Jim Letourneau of the Big Picture Speculator and while the markets have been better over the last couple of months, Jim has had one of the hottest hands out there and it didn't matter which field you were looking at, whether it was high-tech, oil and gas or even a stock like Medicago (MDG). Anyway Jim, probably the story of the day right now and for the next couple of months is Wavefront Technologies. (WEE). Considering Jim is a hydrogeologist, he's got a bit of a leg-up on people looking at the tool that Wavefront produces.

David Pescod: Jim, can you try and explain for the average retail investor, what this tool actually does?

Jim Letourneau: They have developed a process which allows them to inject fluids into rock or soil at higher injection rates and with better sweep efficiencies. Most of the time we are injecting liquids into the ground for environmental clean-up or enhanced oil recovery. The only way we can improve what's going on is by changing the chemistry of what we are injecting. What is revolutionary about what Wavefront has developed is that now we can inject at higher rates and better sweep efficiencies. It is a really big deal, but because it's sort of sounds like existing technologies, some people don't fully understand or comprehend how big and significant these changes are.

D.P: Now let's get into how big this is. In your latest issue of the Big Picture Speculator just out, you gave us how important this could be in some of the old oil fields.

J.L: Yes, roughly a third of the oil ever discovered has been produced and two-thirds is left behind in the reservoir.

The bottom line is improvement in the ultimate recovery of that "left behind" oil is extremely significant. We are talking on a global scale over a trillion barrels of oil. There is sort of an expectation that technology will allow this oil to be recovered, but to date most of the work has been on injecting different fluids. So they will inject water of a different salinity, they'll inject chemicals, like surfactants and polymers and they will inject bacteria, but all of the technologies are injecting something but they are not improving on the injection. Wavefront can actually do a better job at a lower cost, just by injecting water. Injecting fluids can get very expensive. For example, when they inject CO2 into reservoirs for tertiary recovery it recovers more oil and allows us to say we are doing something for the environment. We are getting rid of a greenhouse gas by storing it underground and we are also producing more oil. However in order to get the CO2 from the source to the oilfield pipelines costing tens to hundreds of millions of dollars need to be built first. That is a huge capital investment and that's why so many companies aren't doing it in Canada - they are waiting for some kind of greenhouse gas credit before they will even build a CO2 pipeline.    Meanwhile, Wavefront comes along with this tool that people can lease for a few thousand dollars a month and get better results injecting water. So that's what the big deal is about.

D.P: When you're talking big, the implications for some of these oil companies of what they can additionally recover - I mean, some of these numbers are just mind- boggling!

J.L: And that has always been the case and they've known that this process worked and they knew what it was capable of doing at least five years ago. One of the issues is the implementation. It would cost $200,000 or $300,000 to set a well up to do pulsed injection and now they've developed tools that can deployed using coiled tubing. The process itself hasn't changed, but their ability to implement it in a cost effective manner has changed. With a new technology you want it to be easy for someone to implement. They have made great strides there.

D.P: Let's get to this greed thing again. We are tying to get some of these numbers you've used as an example of how important this technology could be in additional recovery to some companies.

J.L: These are not my numbers because I'm just a guy that likes the company, but BP published their annual Global Energy Review and there is an interview with Tony Meggs, who is their group Vice President for Technology where he states that the average recovery factor for oil reservoirs is 35% of the original oil in place (it varies depending on the field). In the case of BP's reservoirs, a 1% increase in the recovery factor would yield them an additional 2 billion barrels of oil equivalent. Wavefront is routinely saying that they can increase the recovery factor by 10% or 20%. So you can see that the value of this technology is huge - it's billions of barrels of oil just to one major oil company. If it was implemented globally on every injection well, the results would be mind-boggling as would the revenue flowing into Wavefront.

D.P: Up until recently, the company has had trouble introducing new technology at a time to oil and gas companies when oil prices had been lower. I would assume the key is that if several big companies decide to accept the technology, we are at a tipping point where suddenly every company might take a look at the technology. Is that where we are now?

J.L: We are getting closer to that stage. Looking at the adoption of any new technology, you have the early adopters that love to try new things. I think we are past that stage now. There's enough field data, enough proof out there that anyone who dismisses it is going to look like an idiot. Suddenly Wavefront will have to change how they market Powerwave, because up until now they've been kind of - well, we can give you deal, we want to get these installed, etc. There is sort of a different frame of mind once it becomes more popular. Reservoir engineers will be saying - hey, we should try that and let's use it and they are not even going to care how it works as much. They just know they need to do it and then you don't need like a Ph.D. salesmen anymore. You need back-slapping, normal buddy-buddy-type sales. So there is a leap to go from this early stage where you are dealing with a lot of research groups and pretty bright, academic-types and then getting into more common usage. I think they are approaching that stage, but in the interim it could be a tricky transition because your run of the mill fellow who is in charge of a bunch of oilfields may not like someone coming in and presenting things at a level that they may not understand.

They may like to be fed that information in a different way. Anyhow, their marketing will change over the next little while as more and more people go hey - that works and I want to try it. They are not going to need the big song and dance about why it works and all of these other things - they are just going to want to do it.

D.P: If we were going to take the negative position that here is a company with too many shares outstanding (with over 80 million) and losing money every month, what is the bullish argument?

J.L: The bullish argument would be that they are installing more systems all the time. They are not far away from breaking even - they are starting to sign some contracts and get some revenue. Every time they get a new client, it creates another foot hold. These are very, very early stages where a company will try two or three or five systems, but has the potential to install hundreds or thousands of systems. The more people that are trying two or three systems, the better the chance that an order will come in for several hundred systems and that's what I like to see - that they have their fingers in a lot of pies. Powerwave is being used in almost every oil basin in North America now from Alaska to California Offshore they are injecting not only in old water floods, they are injecting CO2, so they have a wide spectrum of clients and a wide spectrum of geological settings with a wide spectrum of fluids being injected. That is laying the groundwork for future successes. They are no longer dependent on one client or one event and it also increases the chance of surprise announcements that they've been talking with some of their clients for five years plus, but a new client can pop in and write some cheques and jump to the front of the line and actually leverage off of all of this R&D and these long discussions that have been happening. So it has the potential to grow quicker than people expect. New technology is where the biggest advances in civilization come from, a new way of doing something initially gets greeted with skepticism and then a few years later it is used everywhere and suddenly nobody worries about Peak Oil for a while.

D.P: You have been around this story for a while and it is finally starting to do what you've expected for a while. You have some interesting targets on the stock doing forward.

J.L: Ultimately, I would look at it and see it's pretty easy to document that the company could be worth several billion dollars in market cap. It has that kind of potential. It's still very, very early days, but with even minor market penetration, it will create huge amounts of revenue for them. In order to get there, it is a series of steps and we are seeing a lot of those steps happening. In the short-term just looking at technical analysis, it has had previous spikes to over $5.00 and one got up to just over $3.50. We expect maybe to see some resistance at $2.50 or so if we draw a down-trend line, but that is just technical analysis - it may not matter. One thing about Wavefront is that once it starts to move, a lot of the people that believe in the story don't sell their shares and then they will probably never sell their shares. There are a lot of technical people that have got involved and they are not going to bail out early. Now we saw what happened when the hedge fund decided to bail out - it really put a lot of pressure on the stock. Then there will be a few traders jumping in and out, but a lot of the people who own shares are kind of in it for the long haul. Maybe they will do some selling and if they do, they'll probably do it around $2.50 - that's what I am saying.

D.P: Thank you so much for your time Jim!


I currently own WEE.V and MDG.V