Description
Pursuit Dynamics has a nearly $500 million market cap, and in my opinion no real chance of ever delivering meaningful revenue. Pursuit has been public since 2001, and significant revenue has always been just around the corner. However, the only thing Pursuit Dynamics has delivered in those ten years is consistent losses and optimistic press releases. In this case I think history is a useful template for the future. As of this morning Pursuit is borrowable in large quantities at prime brokers, and at Interactive Brokers for personal accounts.
Pursuit essentially has a steam injection technology that they are trying to sell into a dozen or so applications ranging from ethanol production to decontamination to fire extinguishing. You can see the product videos at http://www.pdx.biz/home. The product hasn't found a home in any of these end markets. There's a saying in football that when you don't have a good running back you play two running backs. In Pursuit's case I think they're trying to compensate for their lack of a strong end market by playing up a handful of potential uses. I think the product is a joke. For instance, in the food and beverage space Pursuit alleges to have built a better mousetrap for cooking prepared food and beer fermentation. In the fire suppression space they've supposedly created a better sprinkler system based on steam instead of inferior water. Maybe I'm jaded from years of short selling, but I've never seen one of these hokey better mousetrap plays ever work out, but maybe one day I'll get my comeuppance.
Ethanol is the sexiest-sounding end market, and the one Pursuit is promoting the most, so I chose to spend the most research effort learning about their Ethanol Reactor System (ERS). Management is providing really scary-sounding ethanol guidance. They plan to reach five billion gallons of production in three years.
I spent two hours speaking with someone who installed a PDX system and oversaw Pursuit's most talked-about trial. He is a biofuels project consultant who helps plan and build ethanol plants, and a former VP of Operations at Pacific Ethanol. He installed an ERS three years ago at Pacific Ethanol's Boardman, Oregon plant, and maintains regular contact with his successor about the ongoing progress of that trial.
The ERS business model is to give the system to ethanol producers for free, then take a percentage of cost savings/yield improvement. The ERS adds a step to the ethanol production process. Basically, after the corn has been cooked to release the sugars, the ERS re-cooks the corn by injecting steam to get the last 3% of sugars out of the kernel. Thus, PDX claims that the ERS improves yields by 3%. Currently producers use enzymes to capture the final 3%, the ERS is meant to replace the enzymes. These enzymes cost my contact's 40 million gallon trial plant $3,000 per month, and Pursuit offered to share these cost savings with the customer, and take a share of the yield improvement economics. In Pursuit's 5/25/11 press release they state that 2nd generation ERS installations would take "an enhanced share of the economic benefits going forward with 30% of the achieved benefits going to PDX".
According to my contact the ERS failed to achieve any yield improvement at all, let alone the 3% now claimed, and the lofty 14% claimed in the 2/29/08 press release announcing the Pacific Ethanol trial. This is likely the reason Pursuit has been announcing ethanol deals since at least 2007 and has yet to report revenues that reflect those grandiose projections. My contact's personal feeling was that Pursuit is keeping the ERS in the Pacific Ethanol plant so that they can issue press releases about their relationship with Pacific Ethanol, but that the relationship wasn't providing any real benefits for either party to date. The ERS can be turned off without affecting production, and his feeling was that it was only intermittently being turned on.
In addition to failing to produce yield improvements the ERS adds costs to the production process. Because the ERS heats the feedstock by injecting steam directly into it, obviously water is injected into the feedstock as a consequence. Water isn't a desirable additive in ethanol since it goes into combustion engines, so the solution has to be heated a third time to boil off the water injected by the ERS, adding additional production costs. My contact tells me that there are other mechanical solutions that don't use steam and do achieve the 3% yield improvement. So we have a system that produces no yield improvement and adds costs to the process. Sounds like ERS isn't paying its own free rent.
In the 2/29/08 press release announcing the Pacific Ethanol trial, Pursuit projected that the Pacific Ethanol installation would begin generating revenues no later than calendar Q4 2008, saying "Based on results to date, the PDX [ERS] system has the potential to have a multi-million dollar positive impact annually on a plant of this size." Yet, in the 2/9/11 press release announcing a commercial contract at the Pacific Ethanol plant, Pursuit said "PDX expects that revenues will be generated during this calendar quarter." It's as if the last two years never happened, and Pursuit is recycling the same tired old stories.
Some other optimistic statements that seem to have never materialized:
12/11/08: "We will continue to receive revenues from our US Government decontamination programmes and anticipate the first revenues from our agreement with EADS will commence during the year."
11/27/07: "we are very encouraged by our progress in bioethanol and believe that...we will see the beginnings of a significant revenue stream in the 2008 financial year."
10/18/07: "Our global licensee TFBP continues to make good progress towards releasing a fire suppression system including our FireMist® technology and we anticipate the start of a royalty stream in the 2008 financial year."
12/7/06: "we successfully concluded the first phase of a US Department of Defense programme earlier this year. We are actively reviewing the optimum routes to market of our PDX Basilisk decontamination system with a number of global defence contractors and are hoping to conclude agreements, which would lead to the first meaningful revenues from this area in 2007."
12/7/06: "we expect to be cash flow positive by the end of this financial year"
I believe the ethanol story is a repeat of Pursuit's past failures in other end markets. Pursuit has had ten years to find a gainful commercial use, and it hasn't. At Pacific Ethanol alone, they have had three years, and have failed.
FYE 9/30; millions of GBP
Revenue Free Cash Flow
2010 .13 -5.78
2009 .05 -6.43
2008 .46 -6.16
2007 3.05 -5.40
2006 1.50 -3.42
2005 .09 -2.31
2004 .15 -1.45
2003 0.00 -.94
2002 0.00 -1.39
2001 0.00 -.95
Catalyst