Some New Investments in the Transport of Petroleum by Rail

In a previous post, I identified a few potential themes for investment along the lines of "safety".  Government and regulatory agencies have a renewed focus on tightening regulations due to the aftermath of some noteworthy derailments in recent months. 

As a result, I have established positions in two companies:

Kelso Technologies (KLS-X)
Titan Logix (TLA-X)

During the course of my research, I also decided to buy shares in another company which supplies material to fracking operators:

U.S. Silica-Holdings (SLCA-N)

With one exception, the companies are very small and focused on meeting very specific markets.  In my estimation, they are led by very able people and have superior technologies which address real needs.  They also share common challenges:

• expanding the customer base;
• securing financing;
• managing expansion;
• developing strategies to compete with larger entities with more resources.  

A more detailed explanation about the reasons for establishing positions in the companies is presented below.  

Kelso Technologies (KLS-X) http://www.kelsotech.com

Kelso describes itself as follows:

Kelso is an innovator in the railroad equipment supply industry in North America.  The company is engaged in the design, engineering, sales, production and distribution of patented technologies.  A series of external pressure relief valves, eduction tubes and a revolutionary new manway design for rail tank cars and roadway tank trailers are product lines available from Kelso.  These innovative technologies are designed to reduce the risk of environmental harm due to non-accidental releases (NAR) in the transport of hazardous commodities in North America.

Since I cannot do a better job of presenting the company history, I have included this item from the company's web site:

The public company Kelso Technologies Inc. began as a mining equipment supplier in March 1987.  Over time the focus of the company moved into the railroad supply industry.  By 1996 Kelso's new VP of Engineering, Barry LaCroix, had developed a pressure relief valve for the North American rail tank car market for which Kelso would act as the distributor.  The company was a small player and they never really gained sales traction with the pressure relief valve that received regulatory approval and became available for sale in 2001. 

After the US economy shrank in late 2008 and throughout 2009, Kelso struggled financially.  At this time a business developer by the name of James R. Bond was asked by the Board of Directors to review the company's financial status to see if he could help to turn it around.  He recognized the potential of the company and in April 2010 he and other key management began the rebuilding process.  With a newly patented manway technology to offer in addition to the pressure relief valves, the company began the regulatory approval process for the manway and commenced the marketing of their ‘safer technology for the transport of hazardous goods’ to the rail tank car industry.

The company has three main product offerings which are sold to OEMs, repair and retrofit customers:

1. Kelso Clincher Manway - a tanker car portal which is more reliable than older-style manways and much quicker to use
2. Kelso Tiger Tube - the "pipe" which is used to load/unload corrosive chemicals from rail and road tankers (key for hydraulic fracking and the processing of oil sands)
3. External Pressure Relief Valve - a more reliable and "operation friendly" valve for class 111A general purpose tank cars and which are more "roll-over friendly" in the event of derailments
   

The company is based in Vancouver BC, with operations in Lisle, IL (rail); Houston TX (design and trucking); Bonham TX (production) which is close to the company's major customers.  

A brief overview of the company is available here: Company Overview

My reasons for buying shares in the company:

• superior technology
• the likelihood of a growing market due to more stringent regulatory standards for tank cars and a general increase in the number of rail tank cars either new to service or about to be replaced 
• experienced management with deep connections to OEM's such as Trinity
• the company's approach to source components from expert suppliers mainly in North America, thereby reducing initial financial outlays for plant facilities

There are risks.  Some of the major ones:

• competing products may be developed by more well-established competitors, thereby threatening the long-term viability of the company
• financing activity may further dilute the value of company's stocks
• I would prefer to see some younger people in key management positions as evidence of the company's strategy for the future
• there will be inevitable glitches as manufacturing ramps up, although it does not appear that there will be many problems associated with the realization of very sophisticated new technologies (on a related note, the company's adroit management of its parts suppliers will be a key element of success)
• I don't have a sense of the cost competitiveness of the company's offerings in comparison to alternatives
• although "rejuvenated" the company is a young, tiny, fledgling enterprise and thus more 
• vulnerable than larger entities, especially when bad news (e.g. earnings surprises) is encountered

In recognition of these and other risks, I have limited my stake as one component of my risk management strategy.  I expect that the stock will be volatile and will watch it more closely than my other holdings.  (I have established a series of e-mail alerts for the stock as I don't normally view my holdings on a daily basis.) 

Titan Logix (TLA-X) http://www.titanlogix.com

Titan is Canadian high technology company based in Edmonton, Alberta which designs, manufactures and distributes instrumentation and communications systems primarily for the oil and gas, chemical and transportation sectors.  

It offers a range of products:

1. Gauges and control systems for mobile tankers to monitor inventories in tanks and as part of alarm systems to minimize the occurrence of spills of environmentally hazardous materials
2. Burner controls - rugged systems to control ignition and monitor the operation of heater flames for a wide variety of field applications including various types of heaters (line, tank) and incinerators
3. Liquid level gauging systems for storage tanks and process vessels
4. Telemetry and control system - control and communications systems for remote sites for a variety of purposes, including: alarms, data logging, and control.  

The company is positioning itself to meet needs associated with the efficient monitoring of remote sites.  This is important to the field operations of the oil and gas industry, especially in an environment of very high labour costs.  

Most important for the purpose of this investment, there is a heightened public awareness of the dangers of the hazards of handling and transporting materials such as petroleum products and other hazardous chemicals.  This will likely result in more stringent regulations and standards and an increased demand for technologies to increase the safety of operations such as the loading of tankers and the monitoring their contents.  The company has profited mightily in meeting this need (you can check the most recent financial reports).  While the stock has increased substantially in price, I figure that it has room to grow.

My reasons for investing:

• the company has a good record of developing and delivering new products to the market
• it has an established and growing customer base
• senior management is stable: knows the industry and the company through years of experience in the company
• the market for its products will increase substantially concurrent with a more stringent regulatory environment in North America
• the company has an excellent balance sheet and a performance which should facilitate its ability to secure financing for expansion

There are some downsides:

• competition will increase as other companies seek to exploit Titan's market niche
• the company is tiny (50 staff) and, like many small enterprises, will have to demonstrate its ability to "graduate" into a much larger entity: current management may not be able to manage the transition
• the rise of the stock has been stratospheric: can this continue or will investor sentiment sour just as quickly when disappointing news surfaces (as it undoubtedly will - smaller companies are affected by these developments more than bigger fish in the investor universe)

There are many other companies which are seeking to exploit market opportunities in the general area of "safety".  As a result of lessons learned during my previous experience with precious metals mining, I will manage risk by spreading my bets by investing in several companies - this as opposed to staking everything on one or two up and comers.

I will leave it up to readers to undertake their own research and arrive at their own conclusions.  This is an area where I figure that fine profits can be achieved by investing in smaller companies which are focused on very specific market niches - this as opposed to larger entities where "wins" will have a disproportionately smaller impact on their bottom lines.  I will also leave it to readers to do their own analysis of financial statements and the like as this is standard fare in the investment process.  

I'll write about U.S. Silica-Holdings in a later post.