Does a recent ballot initiative to restrict drilling in Colorado mean the party is over for Questor?

Nothing But Blue Sky

And things were going so well! In their second quarter report, released in August, Questor reported another set of spectacular results with sales up 45% over last year. Earnings were up 86%. They now had four strong quarters behind them and their outlook for the rest of the year and moving into 2019 was equally strong. They had been pouring money into their rental fleet, virtually doubling its size in the past year on the back of very strong demand. New legislation passed at the end of 2016 required all drillers in the state of Colorado to use enclosed combustion to burn off their waste gas emissions instead of just flaring them recklessly into the atmosphere. Questor’s incinerators (which reduce the greenhouse gasses produced by oil and gas drilling by a factor of 25) were state of the art and the company was cleaning up. Yes, their patents were due to expire in 2019 but I was hopeful that their strong lead in the sector, the high quality of their units, their good reputation and their existing business relationships would offset the increased competition from other companies that might reverse engineer their technology. And yes, one large customer was accounting for a big chunk of their overall sales. That’s always a concern, but gosh darn it the company was doing so well! I was willing to overlook these two nagging doubts.

Management sounded optimistic. Drilling in the state was at a frenetic level as Colorado seemed to be spared some of the takeaway constraints that were plaguing other oil and gas regions. Other states had been eyeing the success of the methane regulations in Colorado and were considering their own legislation. Ohio, Pennsylvania, North Dakota and Wyoming are all candidates for more stringent waste gas regulations down the line. And while no one seems to expect Texas to invoke similar regulations in the massive Permian basin, Questor still thought there were significant opportunities there as the industry moves towards more sustainable practices with or without a push from government. To take advantage of this, it had been establishing a base of operations in Texas to pursue expansion there.

To sweeten the pot further, Questor had been working on a waste water vaporization technology that they could marry to their incinerator units to deal with the massive amounts of waste water produced by the modern fracking process. They hoped to be deploying this technology in a field situation sometime in 2018 with the eye to commercializing it over the next few years. This could be a huge new market for them as dealing with waste water is a big problem for drilling companies.

In the past, the company had done business with some of the biggest names in the oil and gas industry in countries around the world from Russia and China to India, Egypt and Thailand. If one were to get all breathless about the whole thing, one could imagine a fleet of incinerator units spreading across the planet, politely cleaning away all that foul-smelling methane gas, saving the planet as they went.

Colorado Rising

I reviewed their Q2 report this summer while on vacation in England and feeling pleasantly satisfied with the way things were progressing, I shut the laptop and went to poke around another ruined castle.

But the good times were about to draw to a close. Blissfully unaware of events on the other side of the planet, I hiked, biked and spelunked my way around the picturesque landscapes of Somerset and southern Wales. Meanwhile, in a rather ironic twist of fate, a group of environmentalists in Colorado known as “Colorado Rising” were in danger of pulling the rug out from under my favourite environmental stock play, Questor.

After failing to get an outright ban put in place on drilling in the state, they were attempting to drastically limit drilling by gathering enough signatures to get “initiative 97” on to the ballot for the November elections. This initiative sought to ban energy firms from drilling for oil or natural gas within 2500 feet of schools or other occupied buildings. The current allowable distance is 500 feet. “Big deal”, I hear you say. “Just move 2000 feet to the left and start drilling there”. That’s exactly what I would have said. Except that I guess the state of Colorado is too crowded for that. Apparently, this proposal would drastically limit the amount of drilling that could be undertaken in the state. Some estimates I’ve seen said that drilling would drop by 90% from present levels. It turns out a couple thousand feet is a very big deal.

After stumping hard to get the necessary signatures, Colorado Rising managed to get their proposal onto the ballot for the November 6 election. While oil and gas makes up a big chunk of Colorado’s economy, supplying jobs and filling government coffers, there is nonetheless, a fair bit of public animosity towards the rampant drilling that’s been going on over the last few years. I can certainly understand that. Having a rig banging away in my backyard night and day wouldn’t be my first choice either. The waste gas emission control legislation that Questor has been doing so well by was meant to address some of these concerns, but some people would like to incinerate the whole industry, not just the waste gas it produces.

It is now the oil and gas industry’s turn to reach into its very deep pockets and see if they can turn the tide of public opinion their way. The oil and gas industry accounts for something like 10% of the Colorado economy and employs thousands of people. Its not a shoe-in by any means that this ballot initiative will get passed.

Still, it’s a concern. Judging by the freefall in the share price of Questor, it’s a very big concern, especially for investors.

When Investing Becomes Wild Guessing

Generally speaking, I prefer not to make investment decisions based on speculation (wild guesses). If there is some uncertainty, I like to wait around until the next quarterly report for clarity or until I have some hard data on which to base a decision. But if the potential outcome is extreme enough, sometimes you are forced to try to make a decision with what limited data you have.

It seems like the potential range of outcomes here are pretty extreme. Does Questor have a future of bright, blue skies and happily humming incinerators spreading across the land or does it have a hardscrabble future trying to shill its suddenly unwanted rental fleet door to door?

I saw that Questor Technology traded hands at $2.00 at one point yesterday. Remember when it was comfortably over $4? Yeah, me too. That was so 2 months ago, though. Right now, we are faced with a company trading at $2. At that price it has a market cap of around $50 million. They have $14 million in rental equipment, another $5 million in cash, no debt and a book value (assets minus liabilities) of $23 million (84 cents per share). So that’s something. The company has been through downturns before and with such a clean balance sheet, they could certainly whether this storm and continue on in some fashion. Their patent will expire next year so they won’t really have that competitive advantage to fall back on anymore, but they’ve got the waste water vaporization thing; maybe they can do something with that. At any rate, the company’s not worth nothing! So, I’m not going to give it away. It’s not a panic sell at any price. (Some stocks I’ve owned have been.) Given the way the human mind works, I’m going to pull a nice, round number out of my hat. $1, which is a shade above tangible book value. At the moment, knowing what little I know, with the outcome of the election in November still very much up in the air, I might be tempted to take a speculative leap of faith and buy more of Questor at $1. So that’s my lower bound.

A Tale of Two Questor’s

But what would I sell it at? Should I sell it now at $2? It’s easy to paint a fairly dire picture, especially if you’re in a gloomy frame of mind. Patents expiring, drilling screeching to a halt, competitors moving in. Yikes.

But its also possible to paint a very rosy picture. Ballot initiative doesn’t pass. Drilling continues. Questor doubles down and continues to ramp up the size of its rental fleet to meet heavy demand. Questor expands into other regions, perhaps aided by new environmental legislation. They successfully commercialize their waste water vaporization solution. Earnings double or triple. The stock price rises 5 fold. Crisis averted.

If this mega happy ending were to transpire, I wouldn’t want to have sold at $2.

I suspect the future lies somewhere between these two extremes. There’s enough of a possibility in my mind that the second scenario could ultimately prove to be closer to reality than the first that I am hanging on to my shares for the time being. In a few months we’ll have a much clearer picture of what the future is going to look like for Questor and I can move away from wild guessing back to the more familiar ground of fundamentals-based analysis.

You can be sure that I’ll be watching the headlines very closely on Nov 7th, the day after the election.


Full disclosure: I own shares in Questor Technology.