Specialist engineering firm Corac (CRA:AIM) has cranked back into gear after a large share price sell-off over the past few months. The small cap gained 19.5% to 12.7p after the successful completion of the first phase of a trial of its down hole gas compression (DGC) technology on a natural gas field in Texas.
The company estimates the market opportunity for DGC and its accompanying in-pipe gas compression (IGC) technology, which have been developed at a cost of £27 million, could total $1 billion over the next decade and the market's excitement should be understood in this context.
Interestingly, when Shares interviewed the management last month, chief executive officer (CEO) Phil Cartnell was much keener to talk about the two businesses acquired in 2012 – which have brought with them tangible revenues – than the DGC. The conservatism is understandable, a series of misfires and delays and a tendency to over promise and under deliver have seen the shares lose considerable value against their July 2001 debut.
Getting the oil and gas industry to adopt new technologies is notoriously difficult but this trial could be a significant step on the road to commercialising the technology.
Cenkos analyst Marcus Tregoning, who has a 'buy' recommendation on the stock, is in little doubt over its significance. 'Management highlight that “there remains a lot of work to do” but this is an extremely positive result from the first phase of testing.' Essentially, the DGC and IGC are intended to boost the flow of gas from wells and pipelines as well as having potential applications in other industrial processes.
Last April, alongside a £6.4 million placing priced at 10.5p, the company snaffled Wellman Hunt Graham and Wellman Defence at a cost of £10.9 million. The units have since been renamed Hunt Graham (HG) and Atmosphere Control International (ACI) and sit alongside the Corac Energy Technologies (CET) business which encompasses the DGC and IGC solutions.
The effect of the acquisitions has been immediate with revenue increasing from a mere £300,000 to £15.3 million in 2012 although the group remains loss making.
HG produces large heat exchangers mainly for UK oil and gas refiners, while ACI supplies air purification systems to submarines. HG is sitting on a backlog of £3.4 million for delivery in 2013 and in conversation with us, Cartnell was at pains to emphasise that the submarine market is a relatively resilient area of defence spending.
The Corac CEO is best known for his success running Vega, a pan-European aerospace and defence business, which was ultimately sold to Italian aerospace firm Finmeccanica (FNC:MI) in 2008 for 280p a share, some way north of the levels at which the stock traded when he took the helm in 2001.
Corac is one of Shares' Tips for 2013. Click here to read our original story, published in December 2012.