We are initiating coverage of Scout Exploration, Inc. (OTCQB: SCXN) with a Speculative Buy rating.
Each year there are hundreds of offshore and shoreline oil spills, ranging from tens of millions of gallons to millions of barrels of oil in size, causing up to tens of billions of dollars’ worth of ecological and business damages. Through a recent transaction, Scout has acquired the rights to what may be the most effective method of oil spill containment and remediation.
Scout is a great story and we expect the stock to trade just like defense and bomb detection companies. When there is news of a spill, the stock is likely to roar higher. With a number of milestones and industry news on the horizon, the stock looks like a great entry point at current levels.
Originally funded by a technology incubator, St John’s, Newfoundland-based IDS Offshore Inc. recently sold the rights to its core airborne oil spill containment and response technology to Scout Exploration, Inc., which is commercializing the ground-breaking approach to oil spills. The rights to the proprietary platform were acquired by Scout in February 2013.
With hundreds of offshore and shoreline oil spills ranging from tens of millions of gallons to millions of barrels of oil in size, and causing up to tens of billions of dollars’ worth of ecological and business damage, there is no “holy grail” method of containing these spills in use today. Current methods entail a significant lag prior to deployment of response measures, during which time spill damage can spread exponentially. Clearly, faster and more effective oil spill response represents an immanent challenge and opportunity for the oil exploration, production and transportation industries. Reliable solutions targeted for primary response—the first few hours immediately following an incident, before traditional response infrastructure can reach spills, have a critical impact on the scale of ecological damage and overall remediation costs.
As a result, the unmanned, air deployed SCXN / IDS response systems target this period, and significantly reduce time to containment and oil spill spread. Equipment delivery by air has been an essential military tool for decades, and will become increasingly important in marine emergencies around the world. One of the key factors in the Scout / IDS system is that it leverages existing technology, infrastructure and air deployment methods to deliver an innovative, effective solution with a potential order of magnitude benefits.
After concluding a financing, we expect that the Company will produce and deploy a shoreline-based prototype for initial testing. Following a number of successful on-site tests, management will initiate a series of pilot projects, which will lead to commercialization and what we believe could be significant product revenue or perhaps even technology licensing for multiple systems deployed in a variety of “hot spots.”
Despite rising costs, there is still a high demand worldwide for oil which does not appear as if will slow down anytime soon. ‘Green Energy’ subsidized by government initiatives have neither demonstrated a competitive cost structure nor sufficient efficiency in comparison to traditional fossil fuels and oil. Additionally, there has been increased pressure on government to loosen regulation related to oil exploration, especially in the U.S. to accomplish several goals. These include the creation of jobs, an increase in the supply of oil in an effort to decrease prices, and create energy independence from unstable parts of the globe. For all these reasons, oil is not going anywhere soon.
Table I illustrates a 25-year history of oil supply and demand broken down by region. One point to notice is that there has been a huge spike in consumption in Asia as China and other economies have developed. Another compelling and telling fact that the charts show is the demand for oil over taking the supply in North America. The need for more exploration in this region is apparent if you subscribe to the ‘energy independence’ priority. Again, the point that is made, oil is not going anywhere soon.
Chart I illustrates the forecasted use of oil for transportation only broken down by region through 2040, and projects an increased demand for oil in transportation uses alone of approximately 80% from 200 to 2040.
Chart II shows the forecasted supply of liquid energy sources and methods of extraction through 2040. One key point is to note the increase in deep water drilling as a method to obtain oil will increase. This will no doubt increase the chances for oil spills in oceans, lakes, and seas.
So what does it all mean? As exploration in deep water and other offshore methods increase there will be challenges presented for greater probability for oil spills and catastrophes. Scout Exploration is in a position to meet these challenges.
In order to understand the magnitude of the problem, one must look at the numbers of 2 of the biggest oil spill catastrophes. British Petroleum (NYSE – BP) has paid over $40 billion and counting from the 2010 Gulf oil spill. The 1989 Exxon Valdez spill cost $3.8 billion for clean-up and almost 25 years later the lawsuits still are coming forward.
According to the U.S. Department of Energy, 1.3 million gallons (4.9 million liters) of petroleum are spilled into U.S. waters from vessels and pipelines in a typical year and a major oil spill could easily double that amount.
The cost to an oil company’s bottom line is just the beginning in the clean-up of such hydrocarbon disasters. Degradation of marine environments, loss of wildlife diversity, destruction of fisheries and loss of livelihoods are lingering effects that can take decades to remedy. Additionally, public scrutiny, governmental pressures with new regulation, higher insurance rates, fines and fees, litigation, and share price decrease, act as catalysts for oil exploration firms to partner with innovative companies like Scout Exploration to quickly and effectively clean any disasters.
The original IDS Oil-Spill response has been under development since 2008 at the Canadian NRC Institute for Ocean Technology at St. John’s, Newfoundland. This innovative spill and containment remediation system is unique because the initial response is cut down by an extremely significant amount. This reduction in response time is accomplished by leveraging existing infrastructure and training and deploying the Unmanned Spill Response Vessels (USRV) engineered to be deployed from the air, not by boat. The aircraft are deployed from strategic air base locations with continent wide coverage of ocean and inland waters and can include the use of a hot air balloon. This demonstrates the flexibility and adaptability of the system in tight inlets or other restrictive spaces.
THE SCOUT EXPLORATION TEAM
Scout Exploration has an experienced management team combining many years of experience in start-up ventures in oil and mineral exploration with academic and oil services development.
John A. Roozendaal – President and Director
John Walsh – Secretary and Director
Rene Lange – Director
In our view, Scout’s biggest risks in the near term involve financing along with building and deploying a prototype for the oil spill technology containment platform. As a result, there could be delays which would impact the stock and negatively impact management’s model and timeframe. However, at this stage, we do not believe that these issues appear to be serious threats to Scout, as the need for this product and history of IDS’ development will be in the Company’s favor. Competition from larger firms or even from newer entrants with new technologies or approaches is another typical concern and is also consistent with firms of Scout’s size and standing.
VALUATION AND CONCLUSIONIn our view, given the huge size of the market, the hundreds of instances each year, and need to truly address the problem, we believe that Scout is a unique way to play this market. Much like security and defense or bomb detection stocks rise based on news of incidents around the globe, so too will SCXN likely rise as word of oil spills come to light. Therefore, driven by company milestones and by the seemingly ever-present news of oil spill disasters around the globe, we would not be surprised to see Scout reach $1.00 in the next 12-18 months, if not sooner. Thus, we rate SCXN Speculative Buy.
Analyst: Robert Goldman
Rob Goldman has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
I, Robert Goldman, hereby certify that the view expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report.
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