Enerchem International Inc. (ECH)
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International Inc. is an oilfield services company providing energy marketing, specialty
chemicals for processing and production problems and hydrocarbon fluid solutions to oil
and gas exploration and production companies
Enerchem International Inc. is a provider of specialty chemicals, energy marketing and hydrocarbon well servicing fluids to the oil and gas industry. The companys common shares are listed on the Toronto Stock Exchange under the trading symbol ECH.
CEOCFOinterviews: Mr. Robinson, how has Enerchem changed since you have become CEO?
Mr. Robinson: The most significant change at Enerchem today is the ability to generate better margins on our product lines. In addition, over the past several months our operations have become more stream-lined and efficient. We have changed our corporate structure and corporate culture. With the formation of our new Energy Marketing Group we are in a better position to improve upon the economics of sourcing feedstock supplies for our fractionation plants and to improve resale values of our byproducts.
CEOCFOinterviews: Will you tell us about the basic business of Enerchem?
Mr. Robinson: Enerchem is an oilfield services company providing specialty chemical and hydrocarbon fluid solutions to the oil and gas industry. There are three internal groups inside of Enerchem. The Specialty Chemicals Group manufactures proprietary chemical products. There is the Hydrocarbons Fluids Group, which manufactures drilling fluid, fracturing fluids and specialty solvents and we have the Energy Marketing Group, which was created to reduce feedstock costs, improve byproduct resale margins and to develop a crude oil lease acquisition market.
CEOCFOinterviews: Will you tell us more about the crude oil lease acquisition?
Mr. Robinson: The crude oil lease acquisition is focused on the economic optimization of feedstock purchases for our fractionation plants, sale of the companys hydrocarbon byproducts and the purchase of physical crude from oil and gas companies. We are responsible for all aspects of the customers crude oil delivery from the wellhead to the production facility to the pipeline that eventually access the Canadian energy market.
CEOCFOinterviews: What does the competitive landscape look like for you?
Mr. Robinson: The two principal competitive forces in the specialty chemicals market of western Canada are Baker Petrolite and Champion Technologies, both are large U.S. based companies. On the hydrocarbon fluid side, Gibson, DC Energy and ICTC represent are primary competitors. The energy marketing group, however, is rather unique. While there are other marketing groups, service location is key. We have carved our niche in central Alberta, which is the hub for all the oil producing companies.
CEOCFOinterviews: Why are people buying from you?
Mr. Robinson: We have always been recognized for the quality of our products and services. As an example, our drilling fluids, Drillsol and Drillsol Plus, has been designed to exceed the product guidelines defined by Industry Recommended Practice 14 (IRP14). The IRP-14 specifications were developed by the Canadian petroleum industry to minimize health, safety and environmental concerns in the use of hydrocarbon drilling fluids. Our product was developed in anticipation of this requirement and many of our competitors have not yet met this standard. While this standard has not yet been widely adopted by the oil and gas industry, we believe that it is just a matter of time before the standard is implemented and thereby provide us with a distinct advantage. Until such time, however, there is still cheaper product out there, so we have to be able to reduce our overall cost to be able to compete with those products. We have a definite competitive advantage because we manufacture our own fluids. We can structure our manufacturing to give us the quality of product we need to meet the standards and expectations of our marketplace. In contrast, many of our competitors acquire their fluids from external sources and are unable to ensure consistency in product properties and product flexibility in a dynamic market. We have seen a steep increase in oil prices over the last three or four months and over the long-term I do not think you are going to see much reduction in crude oil pricing. By being able to source better purchasing of our feedstock and having better control on the cost of manufacturing, I think that will probably be our biggest advantage.
CEOCFOinterviews: Are your facilities large enough for your business going forward?
Mr. Robinson: We have about 26,000 square feet of office, warehouse and laboratory space located in Nisku, Alberta, that is on a similar scale to what our competitors would have. We have lots of space going forward and we can grow into it as our volume of work increases. With our fractionation refineries located in Sundre and Slave Lake, Alberta, we have the manufacturing capacity to process approximately 7,500 barrels of oil per day in total. The fractionation facilities are used to fractionate the crude oil and make our drilling fluids, fracturing fluids and specialty solvents. They are strategically located in the province where our fluids are most commonly used, which is in the deeper foothills area and in the northern part of Alberta.
CEOCFOinterviews: How do you apply service after the sale of chemicals?
Mr. Robinson: Typically, we would go out to an oil and gas company location, take a fluid sample which is then taken back to our lab for testing. Every oil and gas well that is drilled has different characteristics. There is no well that is the same in how it produces the corrosion and emulsion problems encountered. With a sample of fluid in the lab our chemical technologists analyze it. They would then look through our inventory of products and start to test the products with the sample until they have solved the problem encountered at the well site. We then go back to the customer and recommend a typical chemical injection to the well to reduce the corrosion or emulsion or knock the water out of the fluid in order to move the fluid down the pipeline to the refineries. We have an infrastructure of fourteen sales and storage sites that typically would hold drums of chemical that would be delivered out to a location. Chemicals are injected on a daily basis and chemical performance is then monitored by our staff of highly skilled service technicians. From there, they would make sure that everything they were treating was working and if not, they would go back to the lab and retreat the sample and recommend a change in chemicals.
CEOCFOinterviews: Do you sell your products on a project-by-project basis or does it become a long term situation?
Mr. Robinson: We have a mix of both. Typically, on the specialty chemical side, our treatment could last over the life of the well. The use of our drilling and fracturing fluids and the specialty solvents would be on a well-by-well basis. However, while these fluids are specific to a job, the customers satisfaction with the performance or cost saving attributes of our drilling, fracturing and solvent fluids will lead to customer loyalty and resulting in a longer term relationship.
CEOCFOinterviews: You have some projects outside of the U.S. and Canada, will you tell us about those?
Mr. Robinson: We are currently involved in a special chemical sales and blending facility in Alexandria, Egypt. We own a 25% interest in the company and have been involved with this operation since 1996. We anticipate a return on our invested capital in this operation in the near term.
CEOCFOinterviews: What do you foresee for the growth of the company?
Mr. Robinson: I think our biggest opportunity is to increase the utilization of the Slave Lake facility. Presently, this facility is only running at about thirty-five percent capacity. We would like to get it to ninety percent and to do that we have to investigate manufacturing new types of fluids. I see a real opportunity out there in the heavy oil business. Currently, in order to move heavy oil down the pipeline you have to blend it with a lighter oil or condensate. As more of the heavy oil projects come on stream, it is going to take more and more condensate to be able to satisfy the demand and, condensate is getting to be in short supply. We think we have an opportunity at our Slave Lake facility to manufacture a light diluent. This new diluent could be a substitute for the condensate that is being used to do the blending today.
CEOCFOinterviews: What do you need to do then?
Mr. Robinson: We have to get the word out to oil and gas producers that we have this product available and hence the start of the energy marketing group and typically the energy marketing people would be in contact with the oil companys marketing people.
CEOCFOinterviews: Will you tell us about the financial picture of Enerchem?
Mr. Robinson: We are well capitalized with shareholders equity at approximately $38 million dollars and have maintained a strong working capital position at eight to nine million dollars. Our current long-term debt is approximately three million dollars. We are projecting to exit this year with substantially higher revenues and improved financial performance as a result of the initiatives undertaken during the year to improve margins and our bottom line. For the six months ended June 30, 2004 we reported net earnings after tax of $958,000, which represents a significant turnaround from the $404,000 net loss for the comparative period in 2003. While spring break-up conditions affected our second quarter performance and the oil services sector in general, we are confident that, with the anticipated increase in oil and gas activity levels during the second half of 2004 and first quarter of 2005, the company should continue to provide improved financial and operating results.
CEOCFOinterviews: In closing, why should potential investors be interested and what should they know that they might not realize when they first look Enerchem?
Mr. Robinson: We are poised for growth at Enerchem, which is one of the first things that should be looked at before investing in any company. I think that there is a real buying opportunity for investors of companies comprising the Canadian oil service sector, if you believe; oil and gas is getting harder to find in North America, production is decreasing, reserve depletion rates are on the rise and drilling activities will increase in order to maintain production levels you should be buying into the sector Ten years ago, the norm was eight or nine thousand wells drilled per year. Today, it would appear that the norm in Canada is twenty thousand wells drilled per year. My thoughts are that the oil and gas services business over the next five or six years will be vibrant and that there will be great opportunities for people to invest in this industry and achieve superior returns. At Enerchem, we think we have some great opportunities ahead. While I have only been at Enerchem since January, I see a real opportunity to increase revenues, improve margins and achieve higher earnings per share. That spells opportunity in my books
Enerchem is an oilfield services company providing specialty chemical and hydrocarbon fluid solutions to the oil and gas industry. There are three internal groups inside of Enerchem. The Specialty Chemicals Group manufactures proprietary chemical products. There is the Hydrocarbons Fluids Group, which manufactures drilling fluid, fracturing fluids and specialty solvents and we have the Energy Marketing Group, which was created to reduce feedstock costs, improve byproduct resale margins and to develop a crude oil lease acquisition market. - Douglas F. Robinson
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