Hedge fund Manager Jan Martínek of Central European Capital Partners’ discusses his investment idea Energy Recovery, Inc. (NASDAQ:ERII).The main reason is that this company has the potential to change the economics of the US fracking industry. The company stated on the investor call last Thursday that their calculations indicate savings of USD5 per barrel in fracking costs. Since the call the share price is up 15%.
Energy Recovery Background
Energy Recovery (ERII) is a US-listed technology company that produces pressure exchanger technology. The technology allows a transfer of waste energy into usable power energy. The company has 500 mln USD Mkt cap, no debt and a cash balance of 100 mil USD.
Energy Recovery first started to sell the pressure exchangers to desalination plants. ERII generates annual revenues of 100 mil USD with a 70% margins and has almost 100% market share in its segment. The water business is generating over 20% yearly revenue growth.
Energy Recovery is now implementing its technology into fracking. The product is called Vorteq. It has partnered with Schlumberger and Liberty Oil Services to supply the product to fracking companies. Below is a video by the chairman of Liberty Oil Services that describes the technology.
The experts estimate that the technology could save around 5 USD per barrel in fracking energy costs. During Q2 ERII is submitting to Schlumberger report on completion of the technology milestone. There was an investor call last Thursday on which the CEO reconfirmed that this will happen during Q2. The new production facility for Vorteq was completed earlier this year, and all supply chains are lined up. When I spoke to ERII chairman Robert Mao last week, he stated that „Vorteq technology is essential, especially in times like today when cost savings are even more crucial than ever from the fracking industry“. ERII should be able to start Vorteq production this year. It could be a game-changer for both ERII and the fracking industry.
On the call last Thursday they again reconfirmed the Q1 undertaking that on the Q2 call they will introduce a new application of their pressure exchanger in other industries. When they announced Vorteq, the share price doubled. If the new application would be significant, there is a potential for material share price re-rating.
The latest investor presentation can be viewed here.
Jan Martinek, Principal, Central European Capital Partners