Repost: Pinnacle Oil's SFD technology and the $64 million question...
Ah Zeev...the $64 million question on PSFD: What are the cash flows, and by so asking, what is PSFD worth?
The way I look at it there are 3 scenarios: the SFD is a fraud, the SFD is a structure finder, and finally, the SFD is the Holy Grail finding structures and predicting hydrocarbon content.
In order:
1) Fraud -- IMO, it has gone on far too long to be a fraud. Two years of testing by two reputable companies (Renaissance and Encal), and one year by another (CamWest). Historic setting contracts picking up virtually all of Pinnacle's expenses plus the choice of an 8% gross override or a 45% working interest in anything found. Testimonials from the three partner's top executives. I rule this possibility out. Nothing has come up as a red flag to me in all my due diligence, for whatever that is worth.
2) Structure finder -- Under this scenario it is a replacement for seismic only. The partners tell me it definitely is a structure finder. Seismic costs $5000-15,000 a mile, a team can shoot 5-30 miles a week, then there is the interpretation time, land access problems, etc. The SFD costs $5-12 a mile, does 150 miles an hour in the airplane, the interpretation is done in real time to days, and there are no access limitations. Does Wall Street take the seismic market ($3.7 billion in 1997) and assume the SFD could capture some percent over some number of years, discount that back to some present value? Or does it come up with a value that reflects what percentage of say Canada and the U.S. etc that can be mapped out, locked up by Pinnacle partners or by Pinnacle itself, and assume a typical wildcat success rate of 10-30% for drilling and discount that back?
3) Finds structure and detects hydrocarbon content -- The Holy Grail scenario, which in tests has been the scenario the SFD is tracking towards and one we shall know over the next two months or so with Shoal Point and several other prospects being drilled. I just can not see how one can come up with a value really under this scenario (or even #2 for that matter.) It is really like a lottery. How much oil and gas is left to be discovered in the world and how much will Pinnacle and its partners be able to grab. May 1998 Scientific American estimated 150 billion barrels of oil left to be found, not including any gas, just oil. But what if that number ultimately proves low with the SFD being able to open up areas to exploration up until now were inaccessible with traditional siesmic? Who the hell knows? You can't. Just figure Wall Street is going to think big. (There is no, zero, zip, nada coverage on Wall Street... but I sense some sniffing around by those who know Encal and Renaissance well. ) Somehow the collective wisdom of Wall Street will come up with a number for the technology value. Later in Pinnacle's life the hard assets start piling up and it becomes a huge asset play. Right now they get to choose the 8% g.o.r. or the 45% working interest. But when PSFD becomes better capitalized the tables are turned. Ultimately Pinnacle becomes the lead partner, acquires the land, and calls in for oil companies to take the drilling risk for... pick a number 20%, 30%? That leaves PSFD with 70-80% of the prospect. And of course Pinnacle will have none of the typical infrastructure associated with oil companies. The margins and return on equity will be very large to say the least.
But projecting cash flows... again, who can tell? NASDAQ wants the same thing. But how can Pinnacle guess what they are going to find next year, let alone tomorrow. So for the NASDAQ application all they could do was ask the three partners to confidentially disclose to NASDAQ their current drilling schedules, and project a base case of Pinnacle's share by using these companies' historical drilling success rates. If the SFD predicts the hydrocarbon content as well, then of course the success rates are significantly higher and the cash flows come in higher. I think NASDAQ is having a tough time with this one. Pinnacle is definitely one for the record books whether scenario 1, 2, or 3 above ultimately pans out.
What is your guess as to a value?
-Dilution
Disclaimer: Consider everything I write to be biased and potentially wrong. The information contained herein is based upon sources believed to be reliable but is neither all inclusive or guaranteed. This is not a report and does not purport to be a complete statement of all data relevant an investment decision in any security mentioned. Certain opinions reflect my judgement at this time and are subject to change without notice. This document is not deemed to be a solicitation to buy or sell any securities, instead consider it to be for entertainment purposes only. I may from time to time have either a long or short position in any security mentioned and will not update my postition.
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