Like Barry Manilow and celebrity cults, small companies with exciting technologies are hard to kill off altogether.
There are always some persistent believers – the kind that keep companies like Torotrak (LON:TRK) and Transense Technologies (LON:TRT) alive. Another to test the enduring faith of investors is Corac (LON:CRA).
Corac’s best known invention is the downhole gas compressor (DGC), a cleverly engineered device that can, in theory anyway, release much of the gas that is left in producing wells when the pressure ebbs and the gas ceases to flow.
This could have considerable value. In its recent results presentation, Corac explained that there are 500,000 active gas wells in North America alone. Its American partner, the giant oil services group Baker Hughes (NYSE: BHI), reckons that 8-10,000 of these could benefit from the DGC.
Even a 10% share of this market would reap 800-1,000 customers. With each DGC selling for around £1m, that amounts to considerable revenue, of which a fair slice would accrue to Corac.
In a research note, Cenkos Securities spells out just how valuable this could be. Deals such as GE Energy’s £1.7bn acquisition of the Wood Group’s electrical submersible pump division and its earlier purchase of Sondex, a specialist in downhole wireline logging and drill tools, are evidence that the industry’s big groups will snap up any proven technology.
“So it is reasonable to assume”, says Cenkos, “that one of the industry majors may well be prepared to invest in order to secure a long term source of growth… we conclude that the potential value of Corac’s technology is many times larger than the current value of the company”.
That much is indisputable. But the question remains.
Will the DGC ever pay off?
The DGC, essentially, is an air compressor that blows air into the gas well, increasing the pressure and driving the gas out. No operator has been able to replicate the effect of increasing the flow rates of gas in the same way that electronic submersible pumps do for oil wells, despite applying the same logic – that it is more efficient to place such a system within the well rather than on the surface.
The technical challenge cannot be underestimated. The rotational speed of the wellbore compressor is roughly 3,000-7,000 revs per minute in an oil well, but needs to be much higher in a gas well. The DGC needs to work up to four kilometres below ground, it must withstand temperatures of up to 150 degrees and cope with water, sand particles and corrosive chemicals.
Assuming it can survive such harsh conditions, it must then rotate at exceptionally high speed, generating maximum impact despite being enclosed in a seven-inch casing pipe.
To achieve this, Corac, which is based on work done at London’s Brunel University, has had to design a unique power electronics system. But the real key to the product is the use of gas bearings.
Rather than resting upon ball bearings and being lubricated by oil, the DGC is enclosed by a sleeve of gas, floating upon it like a bird on the wing. Having tested this under artificial conditions at a site in Cumbria, Corac now believes that the DGC, which is by far the smallest compressor of its kind relative to its power, can work in live conditions.
But investors have been waiting a long time for proof.
The gas compressor moves towards commercial success
Last year former executive chairman Professor Gerry Musgrave was ousted in favour of Phil Cartmell. Cartmell has managed to sign a number of deals that could accelerate the commercialisation of the DGC.
In particular Corac has signed a deal with the Austrian oil major, OMV, which is to pay for an initial feasibility study with a view to using the DGC in one of its on-shore gas wells. This adds to an existing arrangement that should see Italy’s ENI trial the DGC later this year and a third with an unnamed partner in North America.
Progress, especially with ENI, has been painfully slow. But with £21m under its belt after a share issue last November, Cartmell has been given a fair run at the problem.
If Corac can commercialise the DGC, there is no shortage of other potential applications for oil-free compressors that can achieve 70,000rpm, such as in water treatment, cryogenic processing of shale gas, movement of bulk products and improving the efficiency of existing compressors.
But that is for the future. For the time being, the shares are a gamble on the trials in live gas wells. As Cenkos explains “valuing companies with disruptive technologies and high potential is difficult”. Well nigh impossible, I should say. But if the DGC can finally make a commercial breakthrough, its faithful shareholders should be well rewarded.
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• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
The Penny Sleuth.