Penny Stocks: Divergent Energy Services Corp. issues shares to expand

A big U.S. order pushed up revenue and lowered losses for industrial pump-maker Divergent Energy Services Corp. But the company continues to face a fiercely competitive market along with other key challenges.<

DIVERGENT ENERGY SERVICES CORP. (symbol DVG on Toronto; www.divergentenergyservices.com) makes pumps for oil and natural gas exploration companies.

Divergent changed its name from Canadian Oilfield Solutions Corp. in June 2014.

The company’s pumps use a licensed technology that applies alternating electric current to magnets in order to drive a piston. As a result, Divergent’s products have fewer moving parts than conventional pumps. The company believes that this makes them cheaper to operate and maintain. It pays a Chinese company, Han’s Motor, for the right to use the technology. While the pumps are in use by oil firms in China, Divergent is the first to market them in North America.

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In the three months ended March 31, 2016, the company’s revenue jumped 55.0%, to $2.1 million from $1.4 million a year earlier. That was due to a big order in the U.S. Divergent’s losses dropped to $0.02 a share (or a total of $2.2 million) from $0.03 a share (or $2.4 million).

Penny Stocks: Research spending falls 12.7%

The company spent $178,000 (or 8.4% of its revenue) on research in the quarter, down 12.7% from $204,000 (14.9%) a year earlier.

Divergent will likely need to keep selling new shares at current low prices to fund its operations and service its long-term debt. As of March 31, 2016, that stood at $4.2 million—equal to 20% of the company’s market cap. It also held cash of $80,000.

The company needs a sustained rebound in oil prices to spur its sales and earnings. Its technology is unique, but that may make it harder to win contracts in an extremely competitive market. In addition, the stock is an inactive trader, which can increase its volatility, especially when the overall market is unsettled.

TSI Network recommendation: SELL

For our advice on how on two vital ways to cut your risk with penny stocks, read Two big risks of Canadian penny stocks you can avoid.

For our recent report on a penny stock we see as a buy, read New operation set to expand cash flow for Amerigo Resources.

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