Sizzling Stock Picks

[Ed Ajootian]

MACD, Ridgeline (RLE.V) -- great to see this stock make it to this fine board. With the recent runup in the stock price folks may be wondering what the LT potential of this business is.

The best discussion of the potential market for RLE's technology to treat oil & gas frac flowback and produced water is at pages 20-21 of Mackie's initiation report on them (see full report at http://stockgroup.stockhouse.com/baimg/img/newshotline/Ridgeline%20Mackie%20Research%20Capital%20report%20Jan%2016%202012%20.pdf ) . Making fairly reasonable assumptions (but see next sentence) Mackie concludes that if RLE were to capture 5% of that market they would generate just under $1 B a year in revenues and just over half a $B in EBITDA. A large # of the oil & gas wells drilled in this country are drilled in areas where water is not much of an issue so to capture 5% of the total drilled would be quite a challenge I believe.

The above analysis omits 2 material potential markets which could also make this stock a huge winner from here:

1) Water treatment for polymer floods in heavy oil projects in Canada. See the "October 2011" entry at the bottom of this page of the RLE website, http://www.ridgelinecanada.com/s/Water.asp?ReportID=504169&_Type=Ridgeline-Water-Inc.&_Title=Commercialization . Alberta has been having a drought so projects such as this one can't work unless they figure out a way to re-use the water. RLE's water treatment method, which you would recall uses low amounts of heat, is the only one that doesn't screw up the chemical properties of the water thus allowing it to be re-used for polymer hydration. Since in this application RLE's technology is basically the sole "enabling technology", it would seem reasonable to conclude that their margins in this project would be substantially higher than for the normal water treatment work in the US. This polymer flood is expected to be huge, with peak production at 80,000 bopd. For more info see PR dated 10/20/11, http://www.ridgelinecanada.com/s/NewsReleases.asp?ReportID=503533&_Type=News&_Title=Ridgeline-Signs-a-Fifth-Development-Agreement-with-A-Major-Oil-and-Gas-Comp... . In Ridgeline's latest presentation (dated 2/23), at slide 14, they list "Chemical Flood Pilot Results" as a milesone to be announced sometime early this year. I suspect that that is referring to the polymer flood project initially announced in October.

2) Industrial wastewater treatment. See Mackie's description of this market below (from pg. 21 of their report). Using their figures we are looking at one treatment site that, if acquired by RLE and modified to utilize their technology, could generate $9M/yr. in revenues with 90%+ margins, and there are over 150 of these in California alone.

"LAKELAND: AN EXAMPLE OF A POTENTIAL NEW LONGER-TERM

MARKET

"While the oil & gas sector in North America presents an extremely large and attractive market

opportunity for Ridgeline, its technology lends itself to multiple applications, including treating

other industrial waste waters. An example of a potential future market for Ridgeline would be an

acquisition or development agreement similar to that with the Lakeland Processing Company

(private) in Los Angeles, California. On September 13, 2011, Ridgeline announced a Development

Agreement with Lakeland, whereby Ridgline has deployed a Mobile Development Laboratory

(MDL) onsite. The MDL has been used to test incoming waters, with results to date validating the

effectiveness of the technology."

"Lakeland is a water treatment facility that accepts and processes non-hazardous liquid waste

from a broad spectrum of petrochemical, contracting, industrial, marine, and commercial

operations. The facility has one of the largest discharge permits in Los Angeles County at 75

million gallons annually. While currently the relationship between Ridgeline and Lakeland is

only a development agreement, we believe that this facility or one of the 150+ similar sites in

California presents a longer-term opportunity for Ridgeline. The processing of industrial waste at

sites similar to Lakeland generally carries a higher processing fee than for oil & gas water

treatment, in some cases at a rate of $40-$60/m3 compared to $4.50/gallon for the oil & gas

sector. The cost structure is similar in both cases, providing for a potentially significantly higher

margin per gallon of water processed. Using the revenue metrics above, a site like Lakeland

could have annual revenue capacity of roughly $9 million at +90% EBITDA margins. At the

moment, the site is running well below full capacity, closer to 11-12 million gallons based on our

estimates due to the site having to turn away water due to an insufficient

infrastructure/technology base. There would also be an opportunity to add biofuel production to

this site to exploit some of the fats, oils and greases (FOG) that is mixed in with waste water

brought to the site."