rocks to riches report on nxt energy solutions

Rocks To Riches

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Published: August 14th 2012

NXT Energy Solutions (SFD-TSX.V) (NSFDF:OTC)

www.nxtenergy.com

Capital Structure

Basic Options Weighted Avg

Option Exercise Price

Warrants Weighted Avg

Warrant Exercise Price

Fully Diluted

39.5 million 3.23 million $1.02 4.5 million US$1.20 57.3 million

The fully diluted value includes 10 million preferred shares held by the CEO George Liszicasz. Refer to end of report for details.

Market Cap CDN$31.6 million (as of August 13th 2012)

Cash Position About $3 million. No debt. Enterprise Value: $28.6 million (As of August 13th 2012)

Liquidity Average 6 month trading volume: 12,337 shares/day

Top Shareholders

Major Shareholders Shares or percentage held

George Liszicasz 5.2 million shares and 10 million preferred shares

Director and Officer holdings 15.9% basic and 32.0% diluted

Mork Capital Management and its Fund Manager 2.4 million shares (6%)

Goodman & Company 1.5 million shares (3.8%)

Investment Opportunity

The successful application of new technologies can have profound effects on businesses, saving time and money, increasing production and improving safety. But these new technologies must first be proven in the real world before they gain commercial acceptance. I rarely get excited by new technologies, and I am often more skeptical of them then of fast talking mining promoters. That being said, I have become very excited with NXT Energy Solutions. This company has developed a quantum gravity sensor that can detect fluid reservoirs. This has exciting applications in the oil and gas industry. It is not a direct hydrocarbon indicator, nor can it determine exact drill locations or different fluid types. The Stress Field Detector (“SFD”) technology effectively identifies geological structures and reservoir potential which enables oil companies to quickly focus their more expensive exploration activities (Seismic surveys and drilling) on the most prospective areas. This significantly reduces time, money and risk. NXT intends to have its SFD technology become an integral part of every explorationist’s toolbox. After years of development and validation, NXT Energy Solutions has introduced its unique airborne service in 2006. I believe the company is now on the verge of commercial acceptance and its SFD technology will become an integral tool in the oil and gas exploration industry. The company is on track to post a record year in revenues in 2012.

http://www.nxtenergy.com/

Rocks To Riches


Bottom Line: Why I like

SFD

The SFD technology identifies and ranks high potential oil reservoir prospects 10 times faster and at 1/10th the cost of existing methods onshore. The cost of conducting seismic programs can range between $20,000-to-$60,000/line km and is a time intensive process. The SFD tool works equally well over difficult terrains and offshore environments.

By identifying the best targets on massive regional-scale properties, the technology significantly reduces the environmental footprint an oil and gas company would normally make, in addition to reducing permitting time and exploration costs.

The annual global geophysics market is valued at $12 billion. Acquiring even a small fraction of this market share is significant in terms of revenue.

The company leases its planes and builds its own instruments and normally has a 50% to 85% gross margin. NXT Energy Solutions is the sole global supplier of the SFD Technology.

NXT plans to develop multiple steams of revenue that vertically integrate its technology, with the most exciting revenue stream coming in the form of a prospect generator. By leveraging its proprietary data collected outside of client contracts, the company hopes to farm out quality reservoir targets to newly seeded public companies in return for an equity stake, or royalty.

The company already has a 1.5% Gross Overriding Royalty (GORR) on a shale gas resource in the Horn River Basin and Puskwa oil/gas play with Pengrowth Energy Corporation. This represents another potential future revenue stream.

Big Picture potential – Everything, including matter, has wave properties, just like light or sound. Can this quantum technology be applied effectively to hard rock exploration? NXT says yes.

Most Significant

Risks

NXT must show that it can significantly build its cash flow which will depend largely on its ability to demonstrate the value of the NXT survey system to a much wider client base. This commercialization phase of the business can last for several years and the company’s financial position is currently dependent upon attracting new clients. Towards that end, the company is ramping up its survey capacity, outfitting more planes and building and calibrating more SFD instruments. In addition, it has hired and is training more quality interpreters to handle increased business demand. In December 2011, Grafton Withers joined NXT as Vice-President, Marketing & Sales. Mr. Withers spent 20 years in senior management roles in international postings with the Schlumberger group, one of the top international service providers to the oil & gas exploration and production sectors.

Upcoming Catalysts

NXT has recently made technical presentations to new client prospects in Mexico, Brazil, Columbia, the Middle East and Africa. I anticipate the company will announce a string of new contracts in the coming months.

Rocks To Riches


Additional contracts will add to the company’s revenue stream and build investor confidence.

Proof of

Technology

In Columbia, NXT Energy flew blind across the Rubiales oil field complex in May 2009 and identified high-grade anomalies over areas with known oil traps, further confirmation that the SFD Technology can effectively identify oil/gas reservoirs (Refer to Figure 1). Pacific Rubiales, a producing oil company with a market capitalization of $7 billion, is a repeat customer for NXT. To date, NXT has completed contracts and tests valued at $2.6 million and has recently completed $3.5 million of a signed Letter of Intent valued at $4.5 million to explore 6 blocks in Columbia and Guatemala. Figure 1) Pacific Rubiales oil field SFD Signal response

The Ladyfern natural gas fields were discovered in 2000 and hosts 825 Billion Cubic Feet (BCF) of proven gas reserves. In 2007 NXT flew across the Ladyfern Reef and as you can see by the diagram (Figure 2) on the next page, the SFD technology clearly identified the reservoir and even managed to discover smaller untested anomalies. There are numerous other examples on the company website that shows proof of technology. Follow this link SFD Case Studies

http://www.nxtenergy.com/sfd_cs.php

Rocks To Riches


Figure 2). Ladyfern Reef Gas Field SFD Signal Response

How SFD Works

The SFD technology measures changes in the gravitational field using quantum detectors. The company uses multiple sensors since each responds to changes in the gravity field differently. Additional sensors are always in the process of being calibrated in order to be able to quickly expand operations and replace old sensors when necessary. The detectors do not respond to magnitude changes in gravity (like traditional gravity meters). Instead they are sensitive to changes in the orientation of the gravitational field caused by stress changes in the rocks. SFD technology takes advantage of the fact that everything, including all matter, has wave properties. The wave properties of gravity are affected by stress, just as light propagation is affected by stress. It is true that quantum devices can detect changes in the direction of the gravitational field [this is the basis of quantum gravity gradiometers that was first demonstrated by M. Snadden et al., Phys. Rev. Lett. 81, 971 (1998)]. Stress energy caused by regional tectonics acting on a rock mass can lead to changes in the direction (and magnitude) of the gravitational field: this follows from the theory of General Relativity that holds that all forms of energy are sources for the gravitational field. Anisotropic stress in turn will cause a re-orientation (rotation) of the horizontal gravity field. The SFD quantum detectors identify directional changes in stress fields that deviate from larger scale background trends. These anomalies can be correlated to subsurface stress anomalies caused by the development of fluid traps, fault systems and lithologic boundaries. Refer to Figure 3 on next page. This is especially useful with respect to oil exploration, since oil traps are often associated with pressure shadows (areas of lower stress related to areas of higher stress). The SFD sensors detect and record the changes in the orientation of the gravity-stress field as it is flown over an oil field as seen in figures 1 and 2.

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SFD sensors are designed to be immersed and ‘float’ in the regional gravity field using a proprietary approach that utilizes the wave/particle duality of matter. Each sensor element has a near zero mass and is sensitive to the rotational effects of the horizontal gravity field as opposed to the vertical gravity field. What the SFD devise does and does not respond to:

Magnitude changes in the density of the local rock will not affect the equilibrium state of the SFD sensors.

Sudden lithologic contrasts may ‘knock’ the sensor out of its equilibrium (which is a recognizable signal response). The sensors will then return to their equilibrium state.

In order to detect variations of the in‐situ ‘stress‐states’ the sensors are moved across the field at high velocity in a straight line. If the aircraft is turning sharply, it is perceived by the sensor that stress orientation is changing.

SFD sensors do not respond to topographic changes. Shear stress does not exist at surface, only at depth.

Figure 3) SFD Response to Horizontal Stress Fields

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Potential applications in hard rock exploration NXT personnel are successfully using their SFD quantum detectors to identify the distinct patterns of gravity waves over hydrocarbon traps. In the future, a version of the tool could potentially be applied to determine if there are identifiable wave patterns over specific styles of hard rock deposits, like gold, copper, nickel, etc.

Valuation

At this early stage of the commercialization process, it is difficult to assess value other then the purely speculative potential. If we look at a group of successful, publicly traded, geophysical companies, such as the ones in the chart below, we can derive an average Enterprise Value per EBITDA ratio and compare it with what we expect NXT Energy will earn in 2012. (The Data below was sourced from Bloomberg).

Company Market

Capitalization (millions)

Enterprise Value

(millions)

EBITDA (2011)

(millions) EV/EBITDA

Pulse Seismic (TSX-PSD) $148.89 $179.49 $42.94 4.18x

Ion Geophysical (NYSE-IO) $977.20 1024.87 $158.03 6.48x

Global Geophysical (NYSE-GGS)

$194.89 $457.26 $187.47 2.44x

Fugro (NYSE-FURGF) $4,220.09 $5,530.82 $583.10 9.49x

TGC Industries (NASDAQ-TGE)

$189.15 $198.84 $37.38 5.32x

5.58x

Average

NXT Energy Solutions $31.6 $28.6 -$3.47 (2011)

-8.8x

According to Bloomberg, the company’s 2011 EBITDA was -$3.47 million. However, in the first quarter of 2012 NXT posted a record quarter as well as a profit. It seems that NXT is on track have their best year ever. I believe it is not unreasonable to target $2-to-$5 million in earnings this year based on the company’s recent increase in client contracts. The average EV/EBITDA ratio for the group of companies listed above is 5.58. Based on NXT Energy’s earnings growth potential in 2012, I believe the company is currently only trading at a fraction of its potential value when we compare it with its potential peer group. With a growing list of clients who are being won over by the SFD Technology, it’s not difficult to see NXT Energy Solution’s future revenue generation potential. Some of the company’ past and present clients include: Pengrowth, Pacific Rubiales, Ecopetrol, Hocol, BP Columbia, PCR (Argentina), PPL (South Asia), Encal Energy, Renaissance Energy, Nexstar Energy Montana Exploration, CamWest Exploration, Infinity Oil and Gas Rosetta Energy and Virtus Energy.

Independent Assessments

Geoff Carrington, Ph.D., P. Geoph., made the following comments in a report he authored on the SFD technology. “As a result of studies conducted by five independent third parties, the success rate

Rocks To Riches


Chart 1. Warrant and Option Pricing and Expiry Dates and detail on Preferred Shares

Warrants Exercise Price Expiry Date

4.5 million *US$1.20 March 7th-to May 4th,

2014

Options Price

105,600 $0.45

150,000 $0.53

640,000 $0.63

425,000 $0.75

890,000 $0.86

150,000 $0.89

455,000 $1.16

100,000 $1.00

100,000 $2.00

100,000 $3.00

100,000 $4.00

Total 3,215,600 Avg $1.02

*All options are priced in Canadian, only the warrants are in US$ as a result of the spring 2012 financing that was done in US$ at

US$0.75/unit.

of SFD in detecting known hydrocarbon accumulations varies from over 60% to nearly 90%.” The report concludes: “The time and cost savings realized when using the SFD as the first step in evaluating a large block of land can amount to years and many millions of dollars.” Dr. Jairo Lugo, Sr. VP Exploration, Pacific Rubiales Energy stated; “The SFD survey system allowed us to do a timely evaluation of our TEA block in the Putumayo basin. We are making extensive us of the SFD data concurrently with the rest of the information to select the best area for future exploration.”

Management Team

Management and Board of Directors Position

George Liszicasz Director, Chairman, CEO and inventor of the SFD Technology

Andrew Steedman VP Operations

Greg Leavens VP Finance and CFO

Grafton Withers VP Sales and Marketing

Charles Selby Director

Brian Kohlhammer Director

John Agee Director

M. S. (Mickey) Abougoush Director

Thomas Valentine Director

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Preferred Shares: George Liszicasz: Director, Chairman, CEO and inventor of the SFD Technology holds 10 million

preferred shares that are convertible under the following circumstances. (To date none of the shares have been

converted).

2 million preferred shares became convertible into common shares upon issue.

The remaining 8 million preferred shares may become convertible into common shares in four separate tranches

when NXT achieves specific cumulative revenue thresholds of US$50 million, US$100 million, US$250 million and

US $500 million prior to December 31st 2015. (Cumulative revenue is the sum of total revenue earn plus

proceeds from the sale of assets accumulated since January 1st 2007).

In the event that the final cumulative revenue of US$500 million is not achieved by the end of 2015, NXT has the option

to either redeem any unconverted preferred shares for a price of $0.01 per share and forfeit the SFD technology or

retain the ownership of the technology by converting all the remaining preferred shares into common shares. As of

December 31st 2011, NXT has generated a cumulative revevnue of about US$12.2 million that can be applied to the

above conversion thresholds.

Rocks To Riches


All references to material contained in this Rocks To Riches report is public information sourced from the company’s website, press releases,

personal communication with Management.

Thomas Schuster, the author of the Rocks To Riches Report, was only compensated for his time to write this report about NXT Energy Solutions.

Thomas currently holds securities in NXT Energy Solutions.

To receive an electronic copy of this report and future reports please contact Mr. Schuster at [email protected]

About the Author

With a degree in Geological Sciences from the University of Toronto, Thomas started his career in the early 1990s as an exploration geologist in the

famous Timmins mining camp in Northern Ontario. He then moved to Vancouver and took a position as staff Journalist at the well-known mining

publication, The Northern Miner, reporting the merits and shortcomings of Canadian exploration and mining projects worldwide. This built a

foundation for his later work as a Mining Analyst for the Toronto-based institutional investment firm, Fraser Mackenzie. Thomas is currently based

in Vancouver working as an independent consulting mining analyst.

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