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Energy Recovery Continues to Grow

Posted on Tuesday, May 10th 2016

According to a ResearchAndMarkets report, currently only 1% of the global population receives water from desalination projects. The United Nations expects that percentage to grow to 14% by 2025. Water desalination vendor Energy Recovery Inc. (ERI) (NASDAQ: ERII) is perfectly positioned to fuel this growth. But it is not only water desalination that the company is now focused on. It is also exploring and succeeding in the oil and gas segment, which includes gas processing, chemical processing, and hydraulic fracturing – a market that it estimates could account for $369 million a year in recurring opportunity.

Energy Recovery’s Financials

For the recently announced first quarter results, Energy Recovery’s revenues grew 93% to $11.3 million. Net loss continued to decline from $8.3 million a year ago to $2 million, translating to a loss per share of $0.04 for the quarter. Adjusted net loss came in at $0.02 per share compared with an adjusted net loss of $0.10 per share a year ago. The market was looking for revenues of $11.8 million and a net loss of $0.01 per share.

Overall increase in revenues was attributed to the higher mega-project shipments in the current year compared to the previous year and growth in OEM revenue. During the quarter, Energy Recovery recognized $1.25 million in license and development revenue associated with the amortization of the Schlumberger exclusivity fee and had product revenue from the water segment business of $10.05 million.

The company does not disclose outlook for the coming quarters. The market is looking for revenues of $9.3 million in the current quarter with a net loss of $0.05 per share. It expects Energy Recovery to end the year with revenues of $99 million and a diluted EPS of $0.75 per share.

Energy Recovery’s Deals

Last year, Energy Recovery had announced a $125 million, 15-year licensing deal with Schlumberger Technology Corporation to commercialize its VorTeq™ hydraulic pumping system for use in onshore hydraulic fracturing. As per the deal, the $75 million exclusivity fee has already been paid to Energy Recovery. Schlumberger will have exclusive rights to use this technology in the onshore shale gas industry. However, ERII can still leverage its energy recovery technology for other industries. The deal was also subject to certain milestones. According to Energy Recovery’s recent reports, it expects to hit the milestones in the current year. As part of its first field trial with Schlumberger, Energy Recovery has mobilized 5 frac stages at a test facility and expects to follow it up with a second field trial at a customer’s site with 20 frac stages. The milestones will help Energy Recovery earn $50m in payments from Schlumberger.

More recently, Energy Recovery also announced the award of its first large gas processing order. The company won a $7 million order to supply its IsoBoost line of equipment and services in the Middle East to an unidentified customer. The project also has the potential of expanding by another $4 million. As part of the order, Energy Recovery would need to supply and install multiple IsoBoost systems for a new-build plant. Each of these systems will be designed with a flow capacity of 6,000 gallons per minute. It expects to deliver its first shipment to the customer as early as the second quarter this year. The IsoBoost system is another cleantech solution that recovers the pressure energy wasted during acid gas removal in gas and chemical processing plants. Energy Recovery estimates IsoBoost devices will be able to reduce the plant power consumption by 6.5 MW, saving over 57 GWh of energy per year, while reducing CO2 emissions by 39,000 tons per year.

Energy Recovery estimates the global addressable gas processing market to be worth $369 million in recurring revenues for retrofit opportunities. It estimates that 40% of this market is located in the Middle East. The current $7-$11 million win, however, is for a new Greenfield application – a market that given current economic conditions is a very rare opportunity to receive. Energy Recovery qualifies the gas processing segment to be one where the “runway as being quite long“. But the recent win should help it secure a notable entry point in this market.

The market is finally pleased with Energy Recovery’s performance. Its stock is trading at $10.70 with a market capitalization of $560 million. It touched a 52-week high of $13.35 earlier last month. It has recovered from a 52-week low of $2.07 it was trading at back in September last year. Analysts are keeping an outperform rating on the stock and expect it to touch $15.00. Those who have stuck with the slow growth, capital intensive, Cleantech market are surely seeing their patience rewarded. I say, hang on in there as additional benefits are sure to come.

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