Jim Letourneau's Blog

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Wavefront's Changes

Introducing new technologies to old industries isn't for the faint of heart.  

Wavefront Technology Solutions' (WEE.V) original focus was on revitalizing mature oil fields. All forms of enhanced oil recovery (EOR) involve the injection of a fluid. Better injection leads to better EOR performance. It sounds simple on paper and it works on paper, in the lab and in the field. However, the time it takes to commercialize a new technology in heavy industries like the oil patch is on the order of 15 years. Wavefront has been a public company for over 9. The new client cycle of sales, installation and evaluation of Powerwave EOR takes forever in stock market time. According to Wikipedia, patience is the state of endurance under difficult circumstances.

Whenever someone doesn't believe me about how long innovation takes in the oil patch, I always ask them if they know who George Mitchell is. He started working on the Barnett shale gas play in 1981. 

Quarter over Quarter Revenue Growth

Quarter over Quarter Revenue Growth

As of this morning,  Wavefront's market cap is ~$27 million. Cash as of February 28th was over $12 million. The latest quarterly results, released yesterday, have disappointed some investors looking for steady revenue growth. Wavefront mentioned some  future business in Brazil and Columbia worth $1.9 million. The EOR sales funnel isn't empty but but the "dough ray me" is not ramping up as quickly as shareholders would like. 

The most important recent information about Wavefront relates to a commitment to expand into  a couple of new areas, well stimulation and performance drilling. These opportunities are a direct result of Wavefront's acquisition of Vortech Inc.,  a company that had intellectual property (IP) complimentary to Wavefront's, for $4 million. It is looking like a clever deal. 

If you think that new oil supplies are going to come from existing fields by the use of enhanced oil recovery (EOR), then Wavefront has a proven technology. If you think that shale oil and gas are going to lead to energy abundance, Wavefront has a solution that provides dramatic cost savings in horizontal drilling. These are achieved by increasing the rate of penetration (ROP) while drilling by 5-30% (and in one case 94%). My hunch is that the performance drilling business will be significant for Wavefront. Time is money in the drilling business and Wavefront's IP can make a meaningful immediate contribution to drilling performance. I think the adoption rate will be much faster in the performance drilling sector given the ease at which pilot tests have been scheduled. This contrasts with the EOR business where it can take years to line up a field test. I know of a couple of private EOR companies that are looking to acquire water flood assets  

The market previously valued Wavefront on the blue sky potential of its IP. I'm not sure what a patent portfolio that allows field verified substantial improvements in well stimulation, performance drilling and EOR is worth. I would guess that it exceeds Wavefront's current enterprise value of $15 million.

The company has reacted to market realities without selling any of its IP or diluting its share structure. Wavefront will eventually cross the chasm towards mainstream adoption of their IP for EOR projects. In the meantime they have lots of cash and exciting new business opportunities where they can apply their valuable IP.

I own shares of Wavefront Technology Solutions Inc. (WEE.V) which I have personally purchased for investment purposes. I am also a consultant to the company.