Is Petroteq a buy?

Disclaimer: This is not financial advice and should not be construed as such. If you require personalized financial advice, please seek the services of a relevant professional.

This is a transferred post from September of last year.

Image Source: Petroteq Inc.

In May, Petroteq energy soared to highs of ~$0.20 from a price of ~$0.04, representing a near 400% gain. This attracted many new investors, intrigued by the price action and business model of the company. The movement was a result of Uppgard AB (acting as a middleman) offering 0.48 Euro per share to purchase up to 200 million shares of Petroteq. To clarify, this offer was made directly to shareholders (holding a minimum of 1,000,000 shares). Although this offer led to substantial price action, shares may remain undervalued.

Why is this? The simple fact remains; much of the market is uncertain whether the offer is serious/will be followed through. Furthermore, the credibility of the offer is often questioned as people wonder, “if I can buy shares on the open market and sell it to them, why don’t they just buy it on the open market?” For one, it would drive the share price incredibly high. As well, it could take too long, or simply be impossible due to such low volume.

Since then, other entities such as Balmoral investments LTD have offered to purchase shares for 0.66 Euros ($0.78) for transactions over 1.5 million shares (offer adjusted to a minimum of 550,000 shares). Relative to current levels, this represents an increase of 6-7 times. Note, that this offer has only been available for EU investors. Due to regulatory issues, it is not yet available for US investors. According to a Uppgard Konsult AB update from June, “The client and the company are now evaluating the official expansion of the offering to the North American market.”

This being said, the true value of Petroteq Energy does not necessarily hinge on the credibility of these offers. If they both prove to be insincere (which appears unlikely), the company could be undervalued.

What are oil sands?

The idea of separating oil from tar sands is not a new concept. In fact, “the oil sands of Alberta have been developed commercially since the late 1960s” However, the process has proven incredibly environmentally harmful (not to mention low margins).

“Tar sands oil — even the name sounds bad. And it is bad. In fact, oil from tar sands is one of the most destructive, carbon-intensive, and toxic fuels on the planet. Producing it releases three times as much greenhouse gas pollution as conventional crude oil does.”

Is this true for Petroteq as well? Will they get push back from environmental groups? Probably not. In fact, Petroteq brands itself as a sustainable company, putting “the environment first”. How is this possible? To quote PQEFF’s website,

“We produce oil without any significant waste, emissions or water use. We have removed the unwanted externalities from oil production that can be seen in other oil sands operations, fracking, and even conventional wells. So instead, our process LOOKS MORE LIKE REMEDIATION of oil-bearing near-surface sands that are cleaned to EPA Tier 1 quality before being returned, leaving the world a little cleaner than we found it.”

Sounds sufficient from the environmental perspective.

Profitability of the technology:

As affirmed by the 3rd party analysis, the cost of production using Petroteq’s proprietary method is ~$22 per barrel. Considering the method used to procure the oil, a sand byproduct is generated. For every barrel of oil (costing $22), 1.12 tons of (commercial) sand-byproduct is produced. Considering the industrial applications of this sand type, it can be sold for $11.80. Subtracting the cost to produce the oil ($22) by the profits from the sand ($11.80) allows an adjusted cost of $10.20 per barrel. Considering one barrel can be sold for $50-70+ dollars (depending on the market), this is incredibly cheap. Prior to this, separation technology had much lower profit margins (not to mention the environmental impact) …

“In 2014, the cost to produce oil sands crude was more than $60 per barrel (expressed in WTI terms), but improvements and efficiencies have brought costs down to $46 to $53 per barrel, according to one estimate, and the mid $40s, by another.”

Therefore, based on the data and information provided it may be inferred this proprietary method PQEFF holds is likely profitable, allowing for low vulnerability to fluctuations from oil prices (unlike other companies in the tar sands industry). Furthermore, though the extent to which oil sands are recoverable is a question, Utah alone contains 10 billion barrels (of oil) in sands, which is where Petroteq is located. Globally this number is claimed to be in trillions.

PQEFF appears it may be underpriced, with a potential for future growth. Since the completion of the FEED analysis, this play may be de-risked, with the general market thus far potentially underscoring how revolutionary this technology could be.