Revolutionizing Pump Technology A Neodymium magnet is the most widely used and strongest type of permanent, rare-earth magnet commercially available INVESTOR PRESENTATION FEBRUARY 2016 TSXV: DVG
This Corporate Presentation contains certain forward-looking statements and forward-looking information (collectively referred to herein as forward-looking statements ) within the meaning of applicable securities laws. All statements other than statements of present or historical fact are forward-looking statements. Forward-looking information is often, but not always, identified by the use of words such as could, should, can, anticipate, expect, believe, will, may, projected, sustain, continues, strategy, potential, projects, grow, take advantage, estimate, well positioned or similar words suggesting future outcomes. In particular, this Corporate Presentation contains forward-looking statements relating to future opportunities, business strategies and competitive advantages. The forward-looking statements regarding the Company are based on certain key expectations and assumptions of the Company concerning anticipated financial performance, business prospects, strategies, the sufficiency of budgeted capital expenditures in carrying out planned activities, the availability and cost of labour and services and the ability to obtain financing on acceptable terms, all of which are subject to change based on market conditions and potential timing delays. Although management of the Company consider these assumptions to be reasonable based on information currently available to them, they may prove to be incorrect. By their very nature, forward-looking statements involve inherent risks and uncertainties (both general and specific) and risks that forward-looking statements will not be achieved. Undue reliance should not be placed on forward-looking statements, as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in the forward-looking statements, including among other things: inability to meet current and future obligations; inability to implement the Company s business strategy effectively in Canada, Mexico and the United States; inability of the Company to continue meet the listing requirements of the TSX Venture Exchange; general economic and market factors, including business competition, changes in government regulations; access to capital markets; interest and currency exchange rates; technological developments; general political and social uncertainties; lack of insurance; delay or failure to receive board or regulatory approvals; changes in legislation; timing and availability of external financing on acceptable terms; and lack of qualified, skilled labour or loss of key individuals. Readers are cautioned that the foregoing list is not exhaustive. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this Corporate Presentation are made as of the date of this Corporate Presentation and the Company does not undertake and is not obligated to publicly update such forward-looking statements to reflect new information, subsequent events or otherwise unless so required by applicable securities laws.
High-growth, publicly-traded technology firm (TSXV: DVG) Advancing innovative Artificial Lift systems for the oil & gas industry: Revolutionary Electromagnetic Submersible Pump Alternative to traditional pump jack Powered by a permanent magnet motor (1) Offers lower costs, reduced maintenance and minimal environmental footprint Pump installed in client oil well in SE Saskatchewan Jan, 2016 Commercialization anticipated in 2016, initially in Western Canada Existing cash flow positive business unit in Gillette, WY Conventional electric submersible pumps (ESP): Increasing market share Improved gross margins year-over-year (2) Near-term catalysts as the next generation Electromagnetic Pump nears commercialization (1) Referred to as a Linear Motor in the permanent magnet motor industry. (2) Footnotes included in Appendix as endnotes
Mission: Changing the way clients produce energy #1ESP Supplier* 9Years in business 0Safety incidents YTD 25Employees 5.6 % Insider Owned TSXV: DVG $0.19 - $0.54 $28.4MM 94.8MM 52 week range Market cap as at Mar 4 16 Shares outstanding *Gillette, WY - Powder River Basin gas wells; based on internal estimates
The Pump Near commercialization with no immediate competition Lower capital cost and operating cost when compared with pump jacks The Market Nearly 20,000 Oil wells (Bakken, Shaunavon, Cardium, Viking, Niobrara, etc.) where pump jacks are used to produce oil have been identified as candidates In Canada alone, 90% of all new wells are drilled for oil and 88% of all new wells are drilled horizontally 750,000 pump jacks already in use in North America The Opportunity Exposure to a high growth company with pivotal operational catalysts on the horizon Agreement in place with large oil company and first commercial version of the Pump installed January, 2016 Ongoing discussions with other clients to install additional Electromagnetic Pumps
Increases in directional drilling, and horizontal wells in particular, have created new challenges: Bends in the well create points of contact between the rod string and the production tubing; Rod string suffers excessive wear as it cycles up and down 3 million times per year, leading to eventual failure of the rods and occasionally the production tubing; Limited advancements in pumping technology are creating rising costs to produce oil. Critical points of contact in oil wells that result in excessive wear and eventual failure of rod strings.
The Linear Pump: No immediate competition for this technology Reciprocating pump is a modified industry standard rod-pump Powered by permanent magnet motor - magnets lose only 1% of magnetism over 10 year period No external moving parts; everything moves internally in the Pump housing 2 nd Generation Pump improved with 25% more power & 50% less friction than prototypes Ideal for light oil, shallow horizontal wells - can be set inside the horizontal section in a well
The Linear Pump effectively: Eliminates surface lifting equipment (pump jack) Smaller footprint means reduced construction costs, lower environmental impact, and lower impact on farming and ranching. Eliminates sucker rods Worn and broken sucker rods can cost clients up to $153,000 (2) annually to maintain, including the oil not being produced during failures. Eliminates leaking wellheads Wellheads typically leak oil at the stuffing box (the seal around the sucker rod). This is a chronic environmental issue with pump jack operations. (2) Footnotes included in Appendix as endnotes
Low cost manufacturing, attractive margins, and ability to quickly scale-up Simple installation in the field & limited maintenance required for producers Compelling in oil price downturn - lower cost installation and maintenance compared to pump jacks Divergent s management team has hands-on experience building companies and generating value for owners; supported by strong and committed board Viking, Cardium, Slave Point Initial Target Markets in North America Bakken, Viking, Shaunavon, Spearfish 7,500 candidate wells identified in Saskatchewan Uinta Basin Niobrara, Powder River Basin Poza Rica 9,500 candidate wells identified in North Dakota
Market Share Divergent s Wyoming Electric Submersible Pump (ESP) operation is Cash flow positive for the past 11 consecutive quarters Improved gross margins year-over-year despite market conditions (1) Exceeding expected activity levels during the current industry slowdown Largest Provider* of ESP s for gas producers in the Powder River Basin Increasing market share each quarter 2013 2014 2015 Divergent Competitor 1 Competitor 2 Competitor 3 *Source: Internal Estimates of ESP Products & Services for dewatering Powder River Basin gas wells (1) Footnotes included in Appendix as endnotes
Results of Linear Pump performance Continue operations in Wyoming and potential introduction of the Linear Pump in Powder River Basin Continued business development to operators in other oil fields Agreements with additional new operators to test and install the Linear Pump Expansion of Linear Pump inventory based on increased client demand Debenture Resolution Pump Testing by Additional Clients Pump Orders Increase 2015 Pump Lands in SK Staging Yard Pump Results Client Base Expansion Pump Installed Commercialization & Ramp Up Clear line of sight to profitability 2016 & Beyond
PUMP Approaching commercialization Cost-effective & efficient Low environmental footprint MARKET OPPORTUNITY All horizontal oil plays will need artificial lift Sizeable & growing target market (7,500 wells in SK & 9,500 in ND) Application in other basins & plays globally Significant near-term catalysts First commercial version of Linear Pump installed Jan 2016 Agreement with large oil company + discussions ongoing with others
TSXV: DVG Changing the way clients produce energy Divergent Energy Services Corp. Corporate Office 1170, 800 6 th Ave SW Calgary Alberta T2P 3G3 T: 403.543.0060 F: 403.543.0069 www.divergentenergyservices.com
APPENDICES
1. The Linear Pump uses a modified industry standard reciprocating pump currently used with pump jacks, known as a rod pump. The pump is driven by an electromagnetic motor that uses permanent magnets to create thrust to move the shaft of the motor in a reciprocating, or linear, motion. Permanent magnets maintain their strength almost indefinitely, losing approximately 1% of their strength every 10 years. 2. Gross Margins improved to 30% from 23% in the nine months ended in 2015 and 2014 respectively. 3. Annual Rod Pump Cost Assumptions: Rod Strings $20 per meter; 10% of string replaced after a failure event; Service Rig $12,000 per day, 2 days per failure event; 5 days lost production per rod failure; rod string failure rate of 4 failures annually. Oil price of $45/bbland production rate of 50 bbl/day;
Current Technology Drawbacks Surface lifting equipment (Pump Jack) has a high capital cost and requires a large footprint Rod strings in deviated and horizontal wells cause excessive wear due to rubbing against the tubing Rods strings wear from the 3,000,000 annual up/down cycles, which can cost up to $168,000 (3) annually to maintain, including the oil not being produced during failures Mechanical inefficiencies and variable power draw can lead to high electricity costs Leaking wellheads around the rod (from the stuffing box ) is common Linear Pump Benefits The submersible pump has a lower capital cost, reduces construction costs due to no surface lifting equipment No external moving parts means that the Linear Pump can be placed in deviated and horizontal wells as easily as vertical wells No rod string, no external moving parts. Everything moves internally in the Pump housing Permanent magnet motors run on low Amps with no mechanical gears to reduce efficiency Seal not an issue - no moving parts exit the wellhead * The Pumpjack was invented in 1925 by Walter Trout, an employee of Lufkin Foundry and Machine
Electro-Magnetic Submersible Pump (The Pump) Permanent magnet motor technology. Reciprocating pump (similar to rod pumps). Ideally suited for deviated and horizontal oil wells. An alternative to conventional pump jack installations. Electric Submersible Pump (ESP) Conventional pump technology. Rotating pump with multiple impellers. Pumps moderate to high volumes of fluids. 24 m3/d (150 bbl/d) to 24,600 m3/d (150,000 bbl/d). Electric Submersible Progressing Cavity Pump Also called screw or Moineau pumps. Heavy oil, high sand production, gassy wells. Now deployed as a submersible pump system. Eliminates surface motors and costly rod string wear.
Comparative Results: All amounts in USD thousands, except per share amounts and as noted. Three Months Ended September 30 2015 2014 % Change Revenue $1,192 $1,698 (30%) Gross Profit $321 $428 (25%) Net Earnings (Loss) ($882) ($1,438) (39%) Earnings (Loss) per share - Basic and Diluted ($0.01) ($0.01) Nine Months Ended September 30 2015 2014 % Change Revenue $3,799 $4,773 (20%) Gross Profit $1,315 $1,510 (13%) Net Earnings (Loss) ($4,430) ($3,569) (24%) Earnings (Loss) per share - Basic and Diluted ($0.04) ($0.04)
All amounts in USD thousands, except per share amounts and as noted. As at September 30, 2015 Cash and Cash Equivalents $287 Property, Equipment and Trademark $751 Debentures (in CAD, due December 31, 2015) $5,750 As at March 4, 2016 Shares 94,848,820 Warrants 7,725,000 Options 6,800,000 Fully Diluted 109,373,820 Market Cap. ($CAD) $28.4 million
Management team brings decades of experience in the energy services arena Background of the team ideal to move product to commercialization and capture ongoing market share from existing and outdated pump jack technology Alignment with shareholders and strong corporate governance Management Team Ken Berg President & CEO Previous - Sanjel, Amoco Petroleum, Dome Petroleum Scott Hamilton, CA CFO & Corporate Secretary Previous - Solana Resources, Crossfire Energy Services, Inc., Brahma Compression Ltd. Board of Directors Scott Berry Chairman Past Executive Director of Empowering Minds Kenneth Bagan Director of Trican Well Services, past Director of PSAC, Member ICD John Grisdale Past President of CanAir Nitrogen; Past President of US Division, Calfrac Martin Hall Director of Karnalyte; Past Sr VP Finance & CFO of Tesco Corporation Robert Riecken VP Drilling, Completions, Construction, and Supply Chain, Repsol Ken Berg President & CEO, Divergent
$0.60 $0.50 Mar 2014: Final tranche of Debenture ($597k); total gross proceeds of $5.75MM Jun 2014: Shareholders approve name change to Divergent (previously Canadian Oilfield Solutions Corp) Dec 2014: Extends maturity of outstanding debentures to Dec 31, 2015 Mar 2015: DVG Pump test commences June 2015 Ops update + SK operations facility identified Feb 2016: DVG Announces $550k Private Placement Jan 2016: DVG Pump installed in client oil well in SE SK $0.40 $0.30 Dec 2013: $5MM Debenture Issue Announced New management requests a Cease Trade Order to address disclosure concerns in previously released financial statements. Nov 2015: DVG Pump lands in SK for client installation $0.20 $0.10 $0.00 Dec 2013: Revocation of Cease Trade Order & resumption of trading after management s concerns resolved Aug 2014: Q2 results + 5 DVG Pumps ready to ship to Canada. New BD Manager hired Feb 2015: Signed 5 year service agreement for Linear Pump with large oil company; 1 st candidate well identified Dec 2014: Signed 3 year extension to exclusive rights to Linear Motor technology with manufacturer Aug 2015: Q2 Results reported; WY activity levels & market share beat estimates Dec 2015: Debentures extended to Dec 2017, and amended to allow interest payments in shares Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2013 2014 2015 2016
Changing the way clients produce energy Divergent Energy Services Corp. Corporate Office 1170, 800 6 th Ave SW Calgary Alberta T2P 3G3 T: 403.543.0060 F: 403.543.0069 www.divergentenergyservices.com TSX-V: DVG