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Poseidon’s slide deepens on vanishing revenue

Poseidon Concepts Corp.’s unique oil-field services product was soon copied by others.

JASON FRANSON/The Globe and Mail

On Nov. 3, 2011, a small Calgary company announced it was just a day away from coming to life on the public markets. Poseidon Concepts Corp. would hit the markets with a unique oil-field services product, ebullient support from investors and radiant growth prospects. It was primed for a rocket ride.

Only 15 months later, that ride has returned to earth in spectacular form, with a major accounting revision that placed into question much of Poseidon's 2012 revenues, and triggered another punishing drop in a stock that had already fallen into penny territory.

On Thursday, Poseidon said it should not have recorded $95-million to $106-million in revenue in the first nine months of 2012, a period when the company reported revenue of $148-million. Markets, already made nervous by a December announcement that saw Poseidon shuffle its executives and launch a special committee to examine accounts-receivable issues, knocked down the company's shares by 70 per cent. Its stock has now fallen to 27 cents from more than $16 in September.

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"This is probably the ugliest story that we've seen on Bay Street since Sino-Forest," said Martin Braun, senior investment strategist at J.C. Clark Ltd., a Toronto-based money manager.

In just over a year, Poseidon has gone from market darling to pariah, its fortunes drowned, in part, by its own success and the speed with which others copied it.

Poseidon's IPO was burnished by great expectations. It had "buy" and "sector outperform" ratings from analysts. Shareholders had voted 99.98 per cent in favour of splitting Poseidon off from a small energy company. They had reason to be eager: Poseidon expected $55-million in basic earnings in 2011, and more than twice that, $130-million, in 2012.

Poseidon's key innovation was a tank, which looks a bit like an above-ground swimming pool, to hold water for oil and gas drilling. Made up of insulated panels, the tank could be moved with a truckload or two and set up in 24 or 48 hours by a small crew, using a bolt-less connection system patented by Poseidon. A single Poseidon installation could replace more than 100 smaller "beer can" tanks, which are difficult to keep warm in the winter and require costly trucking operations to deliver and take away.

One competitor figures that, at first, Poseidon could save an energy company 45 per cent on its water costs. Poseidon exploded: from 170 tanks in November 2011 to 440 today.

"They probably thought they had a lock on the market, and that nobody else would compete with them," said Scott Saxberg, chief executive of Crescent Point Energy Corp., which has used Poseidon tanks at its U.S. operations.

Charging roughly $3,000 a day for its tanks, Poseidon was the sole rider on a gravy train. Everyone took notice.

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Competitors flooded the market. Today, Poseidon-style tanks rent out for $1,000 to $1,200 a day. In public statements, the company has blamed a downturn in drilling activities. Others pointed to competition. "It's a business now and the free whisky is gone," another competitor said.

A trucking company began bundling water tanks with trucking services, further pressuring rates. Peyto Exploration & Development Corp. quit renting altogether. It now has four or five of its own tanks. "It was a no-brainer," said chief executive Darren Gee. "It was pretty easy to pay them out with just a few jobs."

Several sources told the Globe that companies that had signed contracts with Poseidon at triple the new market rate grew irate and actively sought to take their business elsewhere. Of Poseidon's 440 tanks, only 96 are being rented today. Client anger was further stoked, sources said, by Poseidon itself, which on some occasions left its tanks at drilling sites after the drilling was completed – then sought to charge for the extra time, even though the tanks weren't being used.

In its third-quarter results released last November, Poseidon acknowledged some of the issues, saying it had renegotiated some contracts and "experienced some difficulty in collecting payment from certain customers."

Critics allege the company suffered from poor internal financial controls. Poseidon, through a communications firm it has hired, declined specific comment.

"Determining the reasons for the financial matters disclosed today by the Special Committee are part of its review, which is ongoing, so the company is not in a position to comment on details of the billing and field operations that you are asking about," said spokesman Alan Boras.

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With files from reporter Martin Mittelstaedt in Toronto

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