If we can’t build more pipelines, can we build a better oil tank railcar?

B.C.-based Kelso Technologies describes itself as a “railroad equipment supplier that produces and sells proprietary tank car service equipment used in the safe loading, unloading and containment of hazardous materials during transport. Products are specifically designed to provide economic and operational advantages while reducing the potential of human error and environmental harm during the transport of hazardous materials.” It’s in the right industry at the right time.

There’s stiff opposition to new pipelines. So oil producers have shipped fast-growing amounts of oil by railroad. But the disaster in Lac Mégantic underlined the dangers of carrying oil through populated regions. New oil tank railcars built after October 1, 2015, will contain more safety features. Existing tank cars will have to be retrofitted to meet the new standards between October 1, 2017, and October 1, 2020.

Kelso sees lucrative new regulations

Kelso sees this as a huge opportunity. It calculates that demand for pressure relief valves could hit 50,000 a year until October 1, 2017. The company then expects this to rise to 70,000 a year until October 1, 2020. It also points out that “terminal operators can expect to ship 30% more oil from existing facilities through our higher speed loading and uniform sealing technology, improving their netback profits on shipments of crude oil.”

To meet this demand, Kelso completed building a modern 44,000 square foot facility in June. It says that this gives it a “more streamlined production capability”. The company should generate significant earnings growth. That, of course, could raise its share price. Also, another company may want to acquire Kelso. If so, the shares are likely to jump.

We rate Kelso ‘Speculative’. That’s because its assets total only $13 million (all figures in U.S. dollars unless preceded by a C). And it’s in the volatile manufacturing sector. As a result, only aggressive investors seeking big potential gains should buy Kelso.

Profitable, debt-free and holding cash

Last year, Kelso became profitable. In 2013, it earned six cents a share. On May 22, 2014, it listed its shares on the Toronto Stock Exchange and, on October 14, on the New York Stock Exchange as well. In the first half of 2014, it earned $2.3 million, or five cents a share. That’s up sharply from earnings of $240,636, or a penny a share, in the comparable period a year earlier. Kelso’s revenue jumped much more than its costs.

In the first half, Kelso’s revenue soared by 138 per cent, to $11.1 million. Its regular operating costs rose by only a little over 46 per cent. As a result, the company’s pre-tax income soared to nearly $3.3 million, compared to only $240,636 a year earlier.

These much higher earnings are confirmed by an eleven-fold jump in its cash flow. What’s more, this cash flow exceeded first-half investment of nearly $2.4 million and dividend payments of $436,450. (It introduced a dividend of a penny a share. While this is a small dividend, it’s a positive indicator.)

Thanks to the excess cash flow, Kelso finances itself internally. It is debt free and holds cash of more than $4.5 million.

Kelso is upbeat. It writes “we are extremely optimistic about our position in the industry and the prospects of our future business development.” The company expects to raise its earnings and dividends. In 2015, we expect Kelso to earn about C20 cents a share. We expect its earnings to rise quickly.

Kelso Technologies (KLS–TSX; KIQ—NYSE MKT LLC) is a buy for aggressive investors seeking big potential gains. But conservative investors should not buy it.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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