Energy Recovery: 'hyper-focused' on water
The former chief financial director of Energy Recovery has now stepped into the top job as chief executive on a permanent basis. He reveals plans to develop new packaged product for the desalination market, and takes a wry line on the industry's lively rumour mill.
Chris Gannon, the former financial director of pressure exchanger technology firm Energy Recovery, now permanently installed as chief executive, appears to accept the rumours that have been circulating about his company as a form of flattery. “What struck me in meeting the desalination world is just how well known and well respected we are as an organisation. When you are known so well, you are talked about. I hear rumours, and I chuckle a bit to myself,” he says. It’s a refreshing line to take for an executive stepping into the top job at perhaps the most gossiped-about company in the business this past year. Better still, you get the feeling he’s enjoying the attention.
Much of that attention has focused on the slow progress in developing VorTeq, a spin off product that aims to use the company’s pressure exchange know-how and apply it to the fracking industry. For the record, Gannon says: “People have speculated that Joel Gay my predecessor left because of slower-than-expected progress with VorTeq. That is just entirely inaccurate. Joel left for personal reasons. He was not asked to leave by the board.” Regardless of what did underlie Gay’s departure in Feburary, the fact remains that the development of VorTeq has not moved as quickly as was originally anticipated. Gannon accepts that the project has been delayed, but not that this indicates that the strategy to invest in VorTeq was flawed.
“A lot of people don’t understand the product development lifecycle of new technology, and they assume that it’s a linear process. In VorTeq we have a ground-breaking, very disruptive technology that is going to significantly change the landscape of hydraulic fracturing and that is why a company like Schlumberger wanted to sign an agreement with us,” he says. The deal with Schlumberger, worth $125 million, was signed in 2015; and there is also an agreement in place from 2014 with Liberty Oilfield Services.
“There have been delays and certainly it has taken a little longer than initially anticipated to commercialise the technology,” continues Gannon. “The technology has advanced tremendously over the past several years. As I look forward for this business, I see a technology that is extremely viable, that we can commercialise, and that will be heavily disruptive to the hydraulic fracturing industry, and it will give the two organisations with rights to use it a competitive advantage over the rest of the industry. Yes there have been delays but those delays have been used wisely to further advance that technology.” (See box, below.)
Fully skidded solutions
The goal of developing more new pressure exchange-based technologies extends to the water side of the business too. Along with commercializing VorTeq and MTeq, a mud-pumping technology, growing the water business is one of three core goals that Energy Recovery is “hyper-focused” on for the coming 12 to 18 months. This means growing sales of the existing technology and developing new spin-off solutions, including with third-party partners.
“The long-term strategy that was already in place before I took over as chief executive is in large part the same strategy I will employ, because I believe that is the right strategy for the business,” Gannon says. “I’m augmenting it: I’m adding a desire to dramatically grow the Water business. We’ve spent 20 years building the Water business, we have the pre-eminent pressure exchanger technology, which has the lowest lifecycle cost of any energy recovery technology out there and the highest level of efficiency at 98 per cent. It’s a marvel of engineering. That business has allowed us to do what we are doing now, and to expand into other verticals. We haven’t focused on growing the Water business enough.”
On taking up the reigns at Energy Recovery, Gannon established two distinct business units, Water and Oil & Gas. “I did that to ensure that Water gets the resources it needs to grow further. Rodney Clemente, who leads that organisation, and our sales force around the world, are quite exceptional. We have upwards of 90 per cent market share globally for energy recovery for large scale desalination plants,” he says.
The next step for the Water segment — whose revenue streams divide between mega-projects (MPD), original equipment manufacturers (OEM), which are the smaller installations; and the after-market business, the installed base where it sells parts — is to develop packaged solutions.
“In seawater desalination, I see new product offerings in pumps, and in fully skidded solutions. What I am hearing from customers is that they want more packaged, skidded solutions versus just a pressure exchanger. We want to meet that demand. We are going to be looking at organic growth opportunities, meaning internal new product development, and existing product improvement; and inorganic growth, namely mergers, acquisitions and joint ventures,” Gannon says.
The existing partnership between Energy Recovery and German pump manufacturer Duechting (announced January 2017) through which Energy Recovery has expanded its offering, has been “nicely successful, which is a leading indicator of where we are headed,” adds Gannon.
The vision for the skidded solutions is for a fully packaged product that might include reverse osmosis (RO) membranes, energy recovery devices, booster pumps, and racks and manifolds. “Think about it as standardising the RO units and making it at fixed sizes: for example’s sake, let’s say 5,000, 10,000, maybe 20,000 cubes per day. We’re looking at a lot of different options and talking with quite a number of different partners to work with us on that,” Gannon says. “I believe that there is huge opportunity in the full skidded solutions side of things in seawater RO.”
While exact details of the strategy are still in development, there are some areas where acquisition appears unlikely: “Some things we probably wouldn’t ever entertain buying those businesses because it’s so outside of our core competency: piping, for example — there are a lot of people able to do that better than us.”
In addition to the seawater RO market, the company is eyeing opportunities in brackish water RO, and in other wastewater applications. “There is some really cool technology out there that we would like to have or have the ability to offer our customers. The executive leadership will be present across the water space in the coming years, meeting with current and potential customers and partners. We’re looking at everything at this point.”
Wasted pressure market
If that’s the immediate plan, what of the longer-term? For the future, the focus continues to be on new product development through investments in research and development (R&D). “Long-term, we are aiming to establish or announce a new technology on a roughly 12-month cycle, all based on our pressure exchanger technology. We have this incredible technology, operating at 98 per cent efficiency, and we see an amazing amount of opportunity out there. These opportunities relate to key pain points for customers and potential customers, whether it’s about recycling wasted pressure energy in water, or preserving pumps,” says Gannon.
One strategic focus is the pumping market, worth $53 billion globally in 2017. “There are a tremendous number of pumping assets around the world that are processing some type of hostile processing fluid, and pumps get destroyed, there’s a huge amount of downtime and costs for repairs and maintenance, and huge inefficiencies in that. So that’s a huge opportunity for a company like ours which has a very unique technology that no-one else has. There’s an opportunity to develop that technology and meet a key pain point for companies out there,” Gannon says.
Similarly, the company is eyeing the wasted pressure energy market of $5.5 billion. “There are opportunities to recycle that potentially wasted pressure; refineries, power applications, food, oil and gas, there are a ton of different opportunities out there. This goes to where we allocate our R&D spend. What we look for to qualify a market are high rates of flow, high pressure differentials, high capital intensity, hostile processing fluid. Each one of those is weighted differently depending on the application.”
Given that the company has such unique position in the desalination world, and so dynamic a set of opportunities, don’t the rumours of a potential sale add up? “If a $100-a-share bid comes in, and we’re trading at $8, well yes, you take notice. But it hasn’t happened yet. We are an independent entity and are structured as such with our shareholder base. We will do whatever is in the best interest of our shareholders. Me and our management team are focused on what we can control, which is the initiatives we take and the strategies that we pursue.”
Gannon adds, wrily: “But it’s nice to be talked of, even if what people are saying is not exactly accurate.”
VorTeq: “It’s almost a perpetual motion machine”
“On the water side, we are fully recovering wasted energy that would otherwise be disposed into the atmosphere and reducing the energy cost to desalinate water by about 60 per cent.
In Oil & Gas our main goal is to preserve pumping assets, by isolating the pumping assets from the hostile fluids that they are currently processing. Frac fluid is a mixture of water, sand and nasty chemicals. We’re using our pressure exchanger technology as a material science arbitrage: isolating those pumps. The pumps pressurise clean water and then within our energy recovery technology, VorTeq, where we have 12 pressure exchangers, they transfer the pressure energy, like a water hammer, between that highly pressurised water and the nasty frac fluid. While we’re not reducing energy consumption like we are in water, we’re doing the same activity within our pressure exchanger; namely, transferring energy between a high-pressure column of fluid and a low-pressure column of fluid.
Imagine an eight ball in the middle of a pool table, and a cue ball. If you hit that cue ball just right, it will come into contact with that eight ball, the cue ball will stop, and the eight ball will jettison off into some direction; and that’s a near perfect exchange of energy. We’re doing that with columns of fluid, at efficiency levels more than 98 per cent. It’s almost a perpetual motion machine. The efficiency levels are so significant that they unlock the ability to take the technology into many other industries — water, pulp and paper, oil and gas, and mining."