ViaLogy PLC – Vying for Contracts

http://www.vialogy.com/


So who are Vialogy (LSE:VIY)? Vialogy are a UK based technology firm that seeks to act as a support and information group, primarily aiding the oil and gas industry through a range of new methods. Through the use of Vialogy technologies which include the improvement of seismic images, oil and gas firms are able to reduce the risk associated with drilling through understanding the geology in which they are drilling in a greater depth. Vialogy has a market cap of £20.85m with 926m shares in issue.

















As per the chart above, Vialogy is a typical small-cap company with an extremely volatile share price. It is a slightly illiquid share though with a large number of days finishing flat. Because of this, it is often difficult to build a large shareholding quickly and smaller chunks would need to be pursued. Vialogy has recently risen off is all time low forming a very secure bottom that will now be difficult to be breached in normal trading. It is trading at the lower end of its range with a current share price of 2.25p having been as high as 4.5p in May. On a six year log chart using candlesticks, the share appears to be in a descending triangle. The base of the triangle is the all-time low, so it is unlikely that it would drop below this, but rather, rise out of the triangle through the top. The top is on a sliding scale, but because the top is so long it is declining quickly. In Jan 2013, the top appears to lie around 4.2p, whereas in Jan 2014, it appears around 2.6p. Any good news should immediately push VIY towards the top, and maybe out of the triangle.
Vialogy’s supposedly industry-changing product is entitled ‘QuantumRD’. The technology involves ‘identifying and positioning hydrocarbon deposits’, ‘[maximising] oil recovery using the minimum number of wells’ and ‘optimising infill well locations’. The concept within the technology (QRI) was originally developed by NASA in the late 20th century so has been stamped with quality. QuantumRD itself is a piece of computer software that combines a selection of data including seismic & well logs to define potential oil reserves to within an accuracy of 10% (usually 5%). What is particularly impressive about this software is that there is currently little/no alternative for what it does and is far more efficient than industry alternatives which are more bothersome. QuantumRD is also able to determine rock and fluid qualities such as porosity – something which is unknown through seismic. Through understanding this, an oil and gas firm can maximise its chances of success in exploration and recovery of hydrocarbons. To date it has correctly completed work on over 300 wells.

As described by the company, ‘The key is active signal processing of seismic data; ViaLogy applies proprietary software that adds a synthetic signal to the seismic processing and analysis sequence. Conventional seismic processing seeks to eliminate noise that typically obscures a signal; Vialogy software both uses inherent seismic noise in the data and creates additional synthetic noise to extract the signal of interest.’
For more information on how QuantumRD works, visit the url below: http://www.vialogy.com/pdfs/What_We_Do.pdf

Vialogy hasn’t had an excellent set of results in the past few years. Whilst revenues have been positive they have lingered below £0.15m, the highest being £0.13m and the lowest being £0.03m. Coupled with this, pre-tax losses have all been either -£5m or -£6m. Because of this, there has been serious cash drain. In September last year the Chairman Terry Bond said the following, "Our limited resources, as well as the barriers to entry for a new technology in a conservative industry, dictated a focus initially on just a few companies. After more than a year's effort with three firms, following lengthy and successful pilot projects and extensive technical interchanges, I am pleased to say we have reached contract negotiations and expect awards in the near term."
Since September, Vialogy has lived up to its promises, with numerous contracts spanning a range of super major companies including Chevron, ONGC and another that wished to remain anonymous. This said a lot about Vialogy’s technology and proves that it is top-notch. These contracts provide a vote of confidence that the technology will continue to be successful in the future also. Net loss was slightly better than in 2011 also, as it fell from £5.8m to £4.9m and should improve substantially in the coming year as new contracts are signed and existing ones become monetised. Interestingly the company also said that the best way for it to raise money is through equity placings as it is a better alternative to debt. Whilst I agree with this, it may be useful to note that due to the cash burn, placings will be inevitable. On the other hand, this has failed to hold back multiple rises in the share price in recent years if timed correctly. Vialogy may benefit from a refreshed board of directors also due to its ageing state. The implementation of 2 or more youthful directors may aid the business. AS of the release of the financial year end report, Vialogy also had £555k cash equivalents. Since then, £2.04m has been raised so it should be funded for around 8 months. Full calculations in a comment below. 

To set the scene, in 2011 VIY’s shares fell by around 50% in value after delays from the larger oil and gas companies led to a fall in investor confidence. However, this is true of most new technologies – firms initially wish not to risk part of the prospect and hundreds of millions of pounds drilling a well on the basis of new technology. Thus this is why the new contracts are so important as they validate what the company is saying and prove that it is successful.

The first news statement in 2012 boosted the share by a massive 30% after it said its technology was edging towards being used by several large oil and gas firms, of which two were located in Asia and one in the USA. This was followed up by a placing RNS in mid-January where circa £1m was raised through issuing 100,000,000 shares at a large discount at 1.05p. Yet despite this, the shares failed to fall and actually rose in proceeding weeks by 100% on no reported news. The following announcement was in March when Vialogy reported it had completed preliminary demonstrations with Chevron which had proved to be successful. In the particular incident, QuantumRD was used to trace porosity trends at its US Permian Basin. Consequently its share price rose double digits.

Having completed the impressive Chevron feat, Vialogy announced in April that it had signed contracts with ONGC – the 21st largest O&G outfit worldwide that controlled 80% of oil and gas production in India - another interesting success for such a small company. CEO Robert Dean commented, ‘"This is a major step forward for ViaLogy. ONGC's decision to deploy
QuantumRD in this offshore field is a vote of confidence in a unique technology that makes use of weaker seismic signal data that cannot be accessed or exploited otherwise. Because we can achieve higher resolution in seismic, we can discern more subtle subsurface features, and help make more efficient drilling decisions with the goal of maximizing recovery and reducing the number of exploration and development wells that might otherwise be drilled. We look at this contract as the beginning of a partnership, and we intend to work closely with the ONGC geophysical staff. We hope this will be an opportunity to contribute to India's energy future".



Further confidence in the technology arrived in April when an oil well in Texas was drilled as per predictions via the technology. Porosity and core samples were to predictions. Shares rose over 20% on the news and represented another milestone for Vialogy. Within the RNS, Vialogy noted that they will receive a 5% interest in the field which will also contribute to revenues. As if more proof was still needed, a few days later Vialogy announced the signing of another contract with Chevron, building on its impressive Permian Basin results causing the share price to yet again rise by 13%.And then again, in early May another contract was signed with a major oil and gas company (albeit they wished to remain confidential).
Vialogy also noted that, “The three areas covered by the contracts vary widely in their features; they are geographically distant from one another, and of distinct formation types - sandstones, carbonates, and nonconventional shale. Each has challenged best-of-practice conventional seismic analysis techniques. One is offshore in deepwater, one in an already heavily exploited onshore carbonate formation where secondary development and horizontal drilling are key factors, and one is a new development section of one of the world's largest and, until now, most productive fields. This variety of QuantumRD's applications emphasizes the broad utility of the signal processing technology in addressing E&P challenges worldwide.”

"Over the last few years, we've devoted every resource to breaking into the supermajor market. We adopted a strategy and are achieving our goals in deliberate fashion -identifying and developing the right clients, winning projects that subject the technology to rigorous technical scrutiny, and demonstrating its global reach. This is not an event; it's a process. We believe we are well on our way. From an initial successful project in south central Texas, and also counting some disappointments, we're now working in the world's most challenging fields - such as offshore India -- and with the world's most important companies. Our current contracts are sizable; larger ones should follow. The technology is under sustained technical scrutiny by the finest in the industry; we ourselves have more development work to do. But we believe ViaLogy has passed the tipping point."
Whilst funds have proved a problem for Vialogy, they also raised £2.04m recently with broker Seymour Pierce at 2.75p where the company mentioned that it was able to increase the level of placing due to increased institutional demand boding well for the future of ViaLogy. Just yesterday, Seymour Pierce initiated its following of Vialogy with a buy and a target of 5.5p representing a 100% upside to the current price. Perhaps it is just too early in the product cycle to take a stake in Vialogy.

On the face of operations, Vialogy has clearly struggled in recent years, but as the company mentions they have surpassed the ‘tipping point’. It is easy to underestimate the importance of the new contracts, but this should really kick-start their business that should lead to much increased revenues in 2013/2014. This should occur due to the predicted future contracts of even larger proportions, and the company has delivered on the current contracts. The concept itself is an attractive one to firms as exploration and production firms are always trying to maximise chances of success/production. Once this catches on further, it will become more observed by the mid-size oil and gas firms and potentially could roll out to them, of which there are more. The global economy does pose a threat to Vialogy though, with cash calls the clear problem, but once the cash from the contracts starts to come into view then losses should narrow. The size of the super-majors should also provide immunity to decreased demand should there be a deep recession. At 2.25p, Vialogy looks a future prospect. It has potential, but as with all things it will need time to be realised and the company must be careful with the amount of equity dilutions it undertakes.

8 comments:

  1. Good insight cheers

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  2. Never heard of these guys before. thanks for whoever suggested them. will delve further
    derek

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  3. Well reserched (no pun intended :-) )report thanks. I've been watching the company for 6 months or so but think I'll keep watching for a little while longer.
    Cheers

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  4. How do you calculate the cash burn such that 2.6m cash is only sufficient to cover 4-7 months? Cash flow from operating activities last year was -£1.85mm (py -£2.6m), but even anticipating a big increase in costs, it's hard to imagine a doubling of the monthly burn rate? I'm not even anticipating any revenue at this stage.

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    1. Any chance of an update re Vialogy, since the above article there has been new contracts etc but sadly a falling share price.

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    2. Thank you for your research and opinion on Vialogy. As an investor I would be interested to read an update on Vialogy for future reference. The same request as (Anonymous.26 May 2013) Thanks again.

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  5. Any comment on the recent news flow?
    Further contracts with Chevron, new contract with Gente Oil...oh, and an ever decreasing share price.
    I like what see with Vialogy & have built a good sized holding at prices between 1.01 & 1.07
    One decent RNS is all it will take for a change in sentiment.

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    1. Recent news flow has been slow, but encouraging. I am still disappointed that no real figures are being mentioned with the contracts/deals and that is what is taking any upward pressure out of the share price. Cash balance is not great hence the equity issues so what the market needs is encouragement or a long-term solution rather than continuous equity dilutions. Indeed that is one point I touched upon right at the end of the article.

      The technical position is a little bearish although there is natural support at 1p which is somewhat comforting. I would become unsettled if the share price falls below 1p as that is the last real support barrier. Below that you are looking at 0.1p increments which won't be particularly strong.

      I notice that Final Results last year were released in late June and in 2011 in September. That really is the key piece of news to look out for. Obviously I cannot give advice, but I would be looking to do some risk assessments ahead of that set of financials. I can't imagine they will be particularly good (as it stands) because the contracts will probably filter through to the 2013 results and capital expenditure for 2012 will likely have been quite high.

      As per the Half Year report VIY noted:
      Revenue in the period under review was £84,691 (2011: £40,915), an increase of some 107 per cent. However, as the three contracts dominating our activities during the period under review are commercial arrangements charged in the conventional manner whereby invoices
      are submitted when analysis is completed and presented to the client, income for work done from May through to September is only partly reflected in the interim accounts. The majority of the income will be included in the next set of accounts for the 12 months to 31 March
      2013. At that time we expect to announce financial results consistent with our three year business plan and in line with market expectations.

      Then again, one large contract with attractive numbers attached is all it will take to shift sentiment as you mention.

      El1te

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