Marty, If you liked that one then here's Bo O'Brien's interview in the same magazine. Hot off the 'ol word processor. I needed the typing practice anyway..... :0)
ANALYST REPORT:
GREEN OASIS ENVIRONMENTAL, INC.
Analyst #10006
Raymond C. 'Bo' O'Brien, CFA
President, Portfolio Manager
&Head of Research
Interviewed by John J. O'Hanlon
Specializing in Micro-Cap Stocks
"At Tecumseh Asset Management we specialize in investing in what we call 'micro-cap stocks.' Those are stocks of companies that are almost invariably below $100 million in market capitalization and usually below $50 million. We have found that the greatest opportunities in terms of achieving a long-term rate of return are in this particular sector of the market.
"I've been in the business as a portfolio manager and analyst for 23 years, and over the course of my career, I have migrated down to ever smaller and smaller capitalizations. While doing that I realized that the longer-term rates of return that I achieved for my clients went higher and higher.
"Over the course of 20 years I have achieved a compounded rate of return of about 29.4% annually. And a lot of this has been done by working with microcap stocks. The key part of investing in these companies is really doing your homework."
Three Essential Elements
"There are three elements which are paramount, in my mind, to investing in these. The first is quality of management. I always visit the companies -- I don't take anybody's word that a company exists -- and I want to interview the management and make sure they know what they are doing.
"Second is the business plan. Not only must the management be good and know what they are doing, but they must also follow the business plan. It must be a plan that makes sense. I've got to understand where it is going and how it is going to be executed and see the management follow through. So that requires continual follow-up with a company.
"The third element is capital. The company has to have enough capital to execute that business plan. And that can only be somewhat of a problem with these smaller companies. But the good, solid company will get the capital it needs. These companies tend to be single-product or -service companies. They tend not to be so affected by what is going on in the economy. I don't worry about global trends, because I am more concerned about whether an individual product or service sells or not. This is kind of an overview of what I look for. "
Why the Aggressive Buy On Green Oasis?
"Green Oasis is a company that I think has got an outstanding future, especially n light of some recent news that came out on the company, yesterday as a matter of fact.
"Green Oasis has developed a process which converts waste motor oil, the oil that comes out of your crankcase in your car or other types of industrials, into marketable fuels.
"The primary product is diesel fuels. Of a gallon of waste oil that goes in, or I should say, of 10 gallons of waste oil that goes into the system, approximately seven gallons of diesel fuel come out, two gallons of fuel oil #3 and the rest powers the unit, so there is no waste products left over. There is a small amount of residue which can be disposed of as a non-toxic waste in a regulat landfill.
"The beauty of the process itself is that it is vased on a very old process. It was originally developed by the old Standard Oil of Indiana when it was part of the Standard Oil Trust, in 1910. When they were trying to improve the production of gasoline from crude petroleum, some gentlemem here in Chicago found that by subjecting that crude petroleum to heat and pressure, they were able to significantly improve the yield of gasoline.
"All of the subsequent development that occurred within the refining industry was based on subjecting the petroleum to ever-higher temperatures and pressures. And from that we have ended up developing a range of product that included not only diesel fuel and gasoline, but also things like jet fuel, naphtha, and benzene. We have ended up with these massive refineries that can only process vast amounts of raw oil.
A New Processing System
"What Green Oasis has done is just take a part of this whole process. They have developed, in essence, a mini-refinery. It is a processing system, it is not a true refinery, that takes the waste oil and subjects it to only a small amount of pressure. a small amount of process heat, the heat that makes the process work. It is self-powered by the fuel it has developed from the system, the higher end fuels that come out of the system from the cracking process and produces a very narrow range of products: only two products.
"As a result they can have a significantly scaled-down version of how a refinery operates. They have been able to do something that the major oil companies have been unable to develop. Heretofore, waste oil was generally blended wiht other fuels and sold as bunker fuel, or as stuff to spray on roads to keep the dust down. It has been sold for a number of different type of heavier fuels, which throw a lot of pollution in the air.
"The EPA hasn't really effectively been able to deal with the problem of waste oil. They have left it to the individual states, who are passing regulations which for all practical purposes are only causing the individual states to move this stuff to the various coasts, where it is loaded on ships and used to power the diesel turbines in ships."
Environmentally Correct And There Is An Endless Supply
"In this country we generate about 1.4 billion gallons of waste oil a year. Worldwide, there is approximately 5.5 billion gallons generated, and that is going up as more of the Third World countries get industrialized. But pollution is a big problem anywhere in the world. what this company does is take a product that in some cases they are actually given, or they are paid to take it away, and they can take it and process it into a marketable fuel.
"The cost of their processing is only $0.10 a gallon. In the state of South Carolina where they are based, they do pay as high as $0.17 a gallon for the waste oil. With a $0.10 processing cost, you've got a total cost of $0.27 per gallon a marketable product that today is worth approximately, well yesterday's New York prices were $0.66 a gallon for diesel fuel.
"Other states such as Colorado ---- they pay you to take the stuff away."
Green Oasis Has The Financial Capability To Expand Nationwide,
Or Even Worldwide
"The interesting thing is that because of a variety of reasons, the company has been overlooked in this country. They have struggled on their own to refine the process. I believe it is now in in its seventh generation of equipment. They have had a successful working model since they had their first bench model. But it is now economically viable to produce these units and distribute them worldwide.
"They have had significantly greater demand on an international basis for the units than they have had domestically. However, the company recently learned that Sec. 29 tax credits are available to the company for each gallon, to the tune of $0.137 for each gallon of waste oil processed. This is a tremendous boon, because one of their average Model 400 units, which can generate $857,000 in annual pre-tax profits would qualify for in excess of over $565,000 of annual tax credits, which are marketable credits.
"This, theoretically, makes the company self-financing. Not only do they get the cash flow from the processing of the fuel oils, but they have tax credits which they can sell. These tax credits are 'use them of lose them' type credit. They are good until the year 2008. This will generate the funds the company needs to accelerate its growth rate.
"For all practical purposes, the company could have tax-free earnings for the next 10 years. And be growing at something on the order of minimally 100% per year.
"I believe their revenues will grow that way; there is plenty of waste oil out there to process. If they processed all the waste oil in the country, it would take over 800 units to do that processing."
Their Competitors And How They Compete
"The waste oil industry is comprised of a lot of mom and pop operations. There are in excess of 600 of these scattered all over the country. They tend to be local operations, because the cost of transporting waste oil is the most significant factor in the economics of the business.
"The waste oil collectors typically pick up the waste oil, they clean it of debris, they heat it to remove as much water as possible. Then they either sell it to someone who can use it as a heavy boiler fuel in states that still allow it, or they blend it with diesel fuel to make a marketable fuel oil.
"The various state environmental organizations are passing regulations to bar or ban the burning of these blended fuel oils because of the amount of pollution put into the air. As a result, these small waste oil collectors are shipping the stuff to other states to where they can get rid of it.
"There are several companies that are trying to compete with them to clean waste oil. Amoco Oil Co., one of the major oil companies, for example, takes waste oil and mixes it in with their regular crude oil petroleum at their regular crude oil refinery down in Houston and re-refines it into the full gamut of fuels.
"There are a couple of other smaller companies that have processes for cleaning the waste oil. They take the waste oil, they clean the dirt out of it and they then try and remarket it as something called base oil, which needs the additives put back in to be resold as motor oil."
Functioning On A Regional Basis
"The biggest company that re-refines waste oil into base oil is Safety Clean, right here in Chicago. They probably re-refine or clean about 9% of the total waste oil generated in this country. They have really not been able to make any significant money at it, because they take their base oil, put the additives back in and then sell it as private label motor oil.
"They are bringing waste oil into the Chicago area from as far east as western Pennsylvania. They collect in Ohip, Michigan, Illinois, Indiana and the immediate states surrounding the Chicago area. But there is a tremendous transportation cost involved and it just doesn't make sense. The beauty of the Green Oasis process is their processing systems can be put out in a regional area.
"They can effectively serve an area of about 150 square miles in diameter, where the transportation costs don't hurt the profitability and don't add significantly enough to the cost of the waste oil.
"There are a lot of states where there is a sign, $19.85 for Quick Lube or Jiffy Lube plus $0.50 additional for disposal of waste oil. And that is paid to the waste oil collectors. That is where some of them make their biggest money just hauling the stuff away. One of the biggest problems with this waste oil that is generated is that approximately 200 million gallons of the 1.4 billion generated in this country just gets dumped --- whether in backyards, sewers, overboard from boats. It just fouls the environment. Some feel, though, it is more convenient to throw the stuff in your backyard."
Stand By The Projections
"I have been conservative. I was wrong this year in my earlier estimates and that was because they ran into a variety of problems in terms of getting their plant set up in Charleston. but the numbers I projected were based on manufacturing only, running one shift at the plant to build six units next year, 1997.
"They can easily run two shifts. It is an assembly operation. They could build 12 units with two shifts. And I have built in nothing for either acqusitions or for the processing of waste oil, which they will generate profits off of both.
"The domestic strategy is to acquire the middle-sized waste oil collectors, those guys that collect approximately 4 million gallons per year or so and install a unit and then process that waste oil that those collectors have been collecting for years. The thing about the waste oil collectors is that a lot of them are in their 60s or 70s or even older, and they want out of the business. So they can be acquired very cheaply.
"You don't want to acquire the polluted land because you pick up environmental problems. So you get a long-term lease on it. You sell off the trucks to the drivers andyou incentivize them to go out and hustle and collect the waste oil and get it back to you. The economics of the process are such that you can very easily pay them more for the waste oil they collect than they can get anyshere else because of the profit margins that are built into this.
"Of course the higher the fuel prices go, your margins just expand tht much more. With diesel fuel at $0.65 today and with a processing cost plus collection cost, the highest I know is $0.27, you have a $0.38 spread right there. And when you go to states like Colorado where Green Oasis already has an acqusition lined up, you are looking at a net cost of cleaned, meaning the debris and water removed waste oil, or $0.05 a gallon. You tack on your $0.10 processing and all of a sudden you have a $0.50 spread. Those aren't bad numbers.
"You end up getting into a business with a tremendous cash flow, and extraordinarily high profitability. It is that that will serve as the impetus for the growth of this company."
Confident In The Management
"The CEO, Bill Carraway, is not only very competent, but he has no 'pride of authorship'--- by which I mean he doesn't have to control everything, and he goes out, he will go out and hire the best people he can to get the job done. And he will pay them to do it. If they don't perform --- you get rid of them.
"He did this when he was a senior officer at Hospital Affiliates, when he had to go out and acquire hospitals and make them profitable. He know how to manage people and he knows how to manage businesses."
Our Company Is Investing In, And Recommending The Stock
"We have had a position in it. We continue to build positions for our clients and we have a very special clientele. They tend to be sophisticated, longer-term investors."
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And there we have Bo O'Brien's interview in the Wall St. Corporate Reporter.
Regards,
Ron |
