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Synodon Inc. – A Breakthrough Technology For Pipeline Safety

January 28, 2013 | About:

One of the more interesting comments relating to personal or group accomplishment that I came across in 2012 was this one:

We have added enough new oil and gas pipeline to circle the Earth and then some.

That is certainly a lot of pipeline and sounds like something that must have come from an energy industry participant.

It didn’t.

Who actually proudly made that statement? United States President and climate change activist Barack Obama.

Today when the general public and much of the investment community think about pipelines, they think about one specific pipeline, the very controversial Keystone XL Pipeline that is proposed to transport heavy oil from the Canadian oil sands down to the United States Gulf Coast refineries.

What might surprise the media and general public is that while they have been focused on the Keystone XL, the energy industry has been busy building other pipelines all over North America.

And the certain truth is that even if the Keystone XL isn’t approved there will still continue to be miles and miles of pipeline laid over the coming decade in North America.

Pipelines are a part of life, and with the boom in unconventional energy production in North America they are going to be of increasing importance.

The politicians know this, and they aren’t going to try and stop the unconventional energy revolution that has taken over North America by interfering with pipeline construction. With the high profile controversy of the Keystone XL and the BP Gulf of Mexico spill still very much on the minds of the general public what you can bank on politicians doing however, is being ruthless with energy companies and pipeline operators should there be any environmental damage caused by those pipelines.

Pipeline safety and limiting environmental damage is therefore going to be of crucial importance to the energy companies and pipeline operators. The good news for the pipeline operators is that with their stock prices high and interest rates extremely low, spending a little extra on safety isn’t a problem.

Synodon Inc. (SYD) – A Breakthrough Pipeline Leak Detection Technology

As I looked for companies through which I could try and profit from the growing focus on pipeline safety and leak detection I came across Synodon Inc (SYD) which I think has enormous potential.

Synodon has developed a remote sensing technology that can measure very small ground level concentrations of escaped gas from an aircraft flying overhead. The technology is called “realSens” and it is mounted on a helicopter that then flies (pilot is guided by GPS) over the pipeline being monitored.

The origin of the technology actually dates back to the 1990s when the Canadian Space Agency was attempting to develop a technology that could detect carbon monoxide from orbit. Synodon bought the technology from the Canadian Space Agency and have moved it forward.

As I understand it, the technology is like a big infrared camera that uses reflected light to detect very, very small color changes in the infrared spectrum. Those color changes are caused by various gases, with each different type of gas creating a different color pattern.

The image below shows the technology detecting a traditional pipeline leak. You can see that the leak is immediately apparent and its exact location evident.


Evaluating a technology such as realSens is not exactly my area of expertise. But I don’t need to be much of an expert to figure out three things about Synodon and its product:

1) This technology seems to be considerably better than the current methods being used to detect pipeline leaks.

2) Detecting pipeline leaks is a huge and growing market.

3) If this superior technology were to obtain even a small share of the market for pipeline leak detection in North America, Synodon shareholders will be happy.

Current Leak Detection is Low Tech, Unsophisticated and Manual

I was surprised when I did some digging into what the common leak detection methods are today—there is a lot of room for improvement.

The current, most sophisticated detection techniques for monitoring pipelines for leaks only detects leaks that amount to 1% or more of the total pipeline flow. Any leak less than 1% goes undetected.

That doesn’t sound so good to me. It basically means that with best practices we only become aware of a pipeline leak when it reaches a pretty major size.

The less sophisticated but possibly more precise methods are shockingly simplistic.

One of these methods involves paying a person to walk a pipeline route carrying a device that monitors for leaks. This method has very small range of perhaps several metres with pipelines that are hundreds of km long, done by general labourers getting $12/hr.

The other method involves using trained dogs to detect a problem.

Given the miles and miles of pipeline that have to be monitored for leaks, much of it in very unfriendly terrain it doesn’t take much imagination to realize these methods are lacking.

In fact, the majority of pipeline leaks that are detected are actually done so by third parties such as passers-by or farmers who have pipelines running through their lands.

That makes for horrible PR for the industry. This is a market in need of a game changing technology.

Size of the Prize

The market for leak detection is large. Synodon only needs to capture a small percentage of it to do well.


There are over 2.5 million miles of pipeline in the United States alone. The need for leak detection monitoring goes right from the wellhead where the oil and gas is produced through to the pipes that carry natural gas into the homes of consumers.

According to Synodon’s website the leak detection market that Synodon is targeting is $1.6 billion.

Synodon has an enterprise value of less than $30 million. That looks pretty miniscule next to the size of the prize involved if the realSens technology starts to gain traction.

Here is the revenue that Synodon could generate based on various market share percentages:

- 1% of a $1.6 billion market is $16 million

- 5% of a $1.6 billion market is $80 million

- 10% of a $1.6 billion market is $160 million

- 50% of a $1.6 billion market is $800 million

Synodon’s most recent financial statements show gross margins are ~50%.

That means Synodon could cash flow $80 million if it captured 10% of the market. A 10x multiple on that would value the business at $800 million. That is many, many times Synodon’s enterprise value at its current stock price. That’s a high end multiple, but the beauty of this business is that this should be recurring revenue—these pipelines MUST get checked at least a couple times a year.

Could Synodon’s product eventually capture more than 10% of the market? I can’t see why not if it truly is the most effective technology and is available at a cost effective price. Right now their challenge is to lower pricing; but public pressure to increase pipeline safety should also help the industry increase their budgets.

A study going to US Congress in the coming weeks suggests pipeline companies could be spending 10x what they are now on pipeline leak detection: https://primis.phmsa.dot.gov/meetings/FilGet.mtg?fil=397.

And obviously if Synodon’s product is desirable to companies in North America it is going to be just as useful all across the globe.

Key Indicator To Watch – Customers Coming Back for More

Synodon is a small company that doesn’t have many eyes watching it today. I’ll be watching Synodon to see if customers who try the technology come back for more.

It is one thing for Synodon to get its foot in the door and have someone give the technology a try. It’s a lot more significant if, after trying the technology, the customer signs up for a second contract at an expanded level of service.

Synodon recently had just that happen as Nova Chemicals just extended its realSens pipeline integrity management contract for another three years and tripled the amount of the contract.

Lots of companies will give a new technology a try. There is only one reason to come back for more, and that is that the technology is a cost effective improvement from what was being used previously.

And if the technology is a step up for one user, chances are it is a step up for many more.

I’ll be keeping my eye on Synodon and the behavior of its customers. If customers keep coming back for more it may be a signal that this little company is going to get a whole lot bigger.

Given the current public and government focus on pipelines and their environmental impact this might be the right company, in the right industry, with the right technology at the right time.

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