Blog : FirstGrowth Exploration

September 12th, 2008

We profiled FirstGrowth (FGC - TSX-V) on June 12th for subscribers of Peter Leeds Penny Stocks. After passing this company through Leeds Analysis, we found that FGC is trading in an attractive range with upside potential.

To provide an even deeper look into FGC, we've contacted Gil Schneider, CEO, who generously provided us with the following elaborations.

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For ongoing coverage of FGC and dozens of other penny stocks, buy and sell targets, frequent updates, and full company analysis reports, subscribe to Peter Leeds Penny Stocks.

1. Competitive Landscape:

(who else is going for the same customers, and where does your company fit in?)

In 2007, five companies accounted for 80% of the world market for seismic acquisition and processing services. CGGVeritas became Number One on the market after the CGG-VeritasDGC merger, effective January 2007, representing 27% of the market, almost tied with WesternGeco (owned by Schlumberger, NYSE:SLB) at 26%, followed by Petroleum Geo Services (OSLO:PGS) at 14%, BGP at 7% and Fugro at 5%. The world market for conventional seismic data acquisition and processing services was worth $8.3 Billion USD in 2006 and estimated to top $10.1 Billion USD in 2007, an increase of over 22%.

2. Competitive Advantages:

(what factors give you a leg up on your competition?)

The Company is relatively young, having been founded in 1998 and becoming a publicly traded entity in 2006. Kinetex uses cutting-edge digital sensors made by ION Geophysical of Houston, Texas. Kinetex was ION’s beta/field test partner for four years as the technology was being developed. Unlike conventional analog geophones, these digital sensors are capable of capturing the full waveform of reflected seismic energy. This enhanced data set can assist in the detection of not only potentially oil and gas bearing structures, but also delineate subtle fracture, density and porosity changes – akin to the improvement from an X-ray to a CAT scan.

Being able to accurately determine these key structures can be of great importance in drill planning programs, especially when dealing with challenging unconventional formations. In particular, the ability to define and characterize fracture systems and their interaction with surrounding reservoir and non-reservoir rock types, can infer the location of permeable pathways - leading to enhanced recovery rates and a higher level of reservoir performance.

Kinetex has also pioneered the use of seismic reflection in mineral exploration for industry majors such as Cameco Corp, Coalcorp Mining Inc and Hudbay Minerals Inc. This had been attempted in the past but due to the low resolution and sensitivity of conventional sensors, results were less than satisfactory. A recent survey in the Athabasca Basin for uranium junior Hathor Exploration Ltd. (TSXV:HAT) has proved to be worth its weight in gold. Analysis of the data outlined the location of potential uranium-bearing structures and subsurface features and proved instrumental in target drill selection of Hathor’s drill program. The initial program has been wildly successful with 19 out of 33 holes to date intercepting favorable mineralization beginning to define what could be a world class deposit.

3. Barriers to entry:

(what makes is difficult for new competition to emerge in your space?)

This technology has a very steep capital entry fee – to fully outfit a single crew costs upwards of $10 million dollars and require at least a year’s training to be really proficient. By being an integral part of the beta test program with ION, Kinetex gained a four year lead in field experience with this technology and at the time of commercialization in 2003 was the only company in the world qualified to offer these services. Unlike its counterparts, Kinetex has no legacy equipment to discard or upgrade in favor of this superior technology. Kinetex continues to exercise its expertise in the field, having recently celebrated its 125th digital seismic project, providing clients with strong assurance of quality and reliability.

Kinetex has developed strong relationships with the academic and research community, with recent contract work undertaken for the Geological Survey of Canada and the Quebec Ministry of Natural Resources. Our technical advisory board includes distinguished individuals as Dr. Zoltan Hajnal, Professor Emeritus, University of Saskatchewan, Seismology and Geophysics. Dr. Hajnal is a world expert on hard-rock seismic interpretation and contributed greatly to the interpretation success in uranium exploration. The management and technical team Kinetex has assembled are the company’s greatest assets.

4. Threats to Success:

Surprisingly, the biggest threat to success, is, success. At this point in the Company’s business stage, growth has to be managed very carefully – overexpansion and stressing the Company’s infrastructure would be just as damaging as not seizing opportunities for growth. Management is proud of the fact that the Company has no “burn rate”, as many research and technology-intensive companies do. Our disciplined approach to growth has kept us cash flow positive since inception.

And while a new technology could theoretically upend the entire industry, our experience with the oil and gas explorers and producers is a general reluctance to use anything too close to the bleeding edge – when a geologist or engineer’s decision can steer hundreds of millions of dollars one way or another, they tend to favor tried and true, conservative technologies. Case in point, even though 3D seismic gathering techniques have been around since the early 1970’s, it is only now in 2008 that international companies such as BP are moving to standardize on 3D data sets.

5. Industry Outlook:

Rising energy demand from the developing nations, notably India and China, continue to drive exploration and production at a frenetic pace. The world market for seismic data acquisition and processing services was worth $8.3 Billion USD in 2006 and estimated to top $10.1 Billion USD in 2007, an increase of over 22%. This trend is set to continue into 2008 and beyond - Oil and Gas Producers are continually looking to replenish reserves through new exploration as well as increase recovery rates from existing assets.

Time-lapse seismic surveys can greatly assist in reservoir management, as can the incorporation of Full Wave data, which allows engineers to “see” the steam or water pressure wave and tune their recovery efforts accordingly. Unlocking reserves from complex subsurface geologies such as tar sands, oil and gas shale, and unconventional deposits all require rigorous data collection, processing and interpretation. Digital high resolution Full Wave seismic data is the “gold standard” of the industry and demand for this service is strong.

6. Company Outlook:

(what do you expect your company to look like five years from now?)

One of the major milestones for the Company is to grow annual revenues to $50M, which Management feels is attainable within a five year window. For comparison purposes, Kinetex had revenues of $15.5M in 2007, $9.2M in 2006 and $4.9M in 2005, representing an increase of 68% over 2006 and 214% over 2005. With the equipment and human infrastructure being put into place, the Company can “build out” and take on larger and more complex projects. As our CEO is fond of saying, “this business can explode with the stroke of a pen”. To illustrate, Kinetex recently began work on a $15.6M contract for a private company exploring for potash – this one contract is equal to last year’s annual revenues.

To facilitate this growth, Management has focused on geographic expansion in key exploration areas. Kinetex recently established a branch office in Bogota, Colombia to service the rapidly growing South American exploration community. More than 80% of Colombia’s hydrocarbon-rich territory remains relatively unexplored with enormous potential in its frontier areas, which share many of the geological features of its oil-rich neighbor, Venezuela. In North America, crews have been deployed to Quebec’s emerging Utica Shale Basin to support exploration interest in the area. By servicing a broad geographic and industry-specific base the Company will be able to counter any region- or commodity-specific slowdowns, such as depressed natural gas prices seen affecting exploration in Western Canada recently.

The mineral exploration space, which is uniquely serviced by Kinetex, continues to hold great potential. Geologists and mining engineers recognize the value this technology can provide and are beginning to request seismic surveys not only for exploration but minesite planning and development issues, such as site optimization, shaft placement and hazard avoidance.

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