If trimming the fat is all the rage, then 2007 could be a very good year for coal recycler Headwaters (NYSE:HW). Last week, the firm announced that it has decided to develop a new business unit around technology it has created to transform unusable "heavy oil" into light crude.

So far, investors don't seem to care; the stock has remained essentially flat since the announcement, which was made last Tuesday. Perhaps that's because of Headwaters' legacy with synfuel?

It's a sad story, to be sure. After years of profits derived from transforming coal waste into synthetic gasoline, Congress appears set to eliminate the tax credit that made this business profitable in the first place. Buh-bye synfuel and profits. (Net profit was down 16% in the recently completed fiscal year.)

Still, heavy oil isn't precisely the same as synfuel. It certainly won't need the same government largesse. Why? No one has to be convinced to buy oil. Refiners such as Valero (NYSE:VLO), Chevron (NYSE:CVX), and BP (NYSE:BP) will always benefit from higher yields from their feedstocks. That's why Headwaters believes its technology could be worth $50 billion or more to the refining industry.

But that's long-term. In the here and now, my estimates say that Headwaters' core construction business is worth $18 to $19 a share by itself. If so, the rest of the business, including Heavy Oil, is valued at no more than $6 a share.

Is that really fair? History says no. Rewind to 2000, when synfuel first became a major business for Headwaters. Capital IQ says the company recorded $27.9 million in sales and $21.3 million in gross profit that year, most of which came from synfuel.

Now, what if Heavy Oil follows a similar track? Applying a normalized 40% tax rate to $21.3 million in profit -- remember, synfuel has delivered huge margins -- results in a $12.8 million contribution to earnings. Assuming no further dilution of Headwaters' stock, that's $0.30 per share that I believe investors could see as soon as fiscal 2008.

Wishful thinking, you say? Maybe. But if I'm right, at $6 a share, Headwaters' Heavy Oil group today trades for just 20 times its earnings power. That's hardly expensive for a very high-growth business operating in an industry that's badly in need of innovation. Heck, it may even be cheap.

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Fool contributor Tim Beyers no longer owns shares of Headwaters but he may reconsider. Get the skinny on everything Tim is invested in by checking his Fool profile. The Motley Fool's disclosure policy is a rebel with a cause.