Best stock to invest in – Can Investors Recover Faith In Energy Recovery?

Best stock to invest in

by Debra Fiakas CFA

Despite reporting the highest gross profit margin in Energy Recovery’s (ERII: 

Nasdaq) history, investors were sorely disappointed with financial
results in the Company’s second quarter ending June 2017.  On
the first day of trading following the earnings release the share
price gapped downward and closed even lower under above average
trading volume.  This is likely because there was some
expectation that Energy Recovery could finally report a net profit
in the quarter as sales of the Company’s flagship PX Pressure
Exchanger to the desalination market had appeared to pick up in
recent months.  Unfortunately the Company reported a net loss
of $500,000 or $0.01 per share on $12.2 million in total sales.

During the earnings conference call management took some pains to
defend its business model focused on successive product innovations
based on the Company’s core pressure exchange technology.  The
plan has been under execution for several years now with the first
example in the VorTeq hydraulic fracturing system for use in pumping
fleets at oil or gas wells.  The VorTeq was expected to gain
rapid acceptance in the oil and gas industry that experiences high
costs and frequent delays with conventional hydraulic facturing
systems.  The VorTeq hydraulic pumping system is designed
extend the life of pumps by re-routing the abrasive proppants away
from the high-pressure pumps and allowing only pure water to touch
the pump.

In October 2015, Schlumberger (SLB: 

NYSE), a leader in the oil and gas servicing sector, licensed the
technology VorTeq technology, but has yet to place units in the
market.  Energy Recovery has had to make design changes to the
VorTeq in order to deal with vibration problems that surfaced as
Schlumberger and Energy Recovery tested a prototype system. 
Energy Recovery has been working with a leading value designer
Kemper Value and Fittings Corporation (division of Caterpillar;
CAT:  NYSE) to develop a second generation manifold for the
VorTeq. The company has also made improvements to the ceramic
cartridge that is the key to proppant-water separation. 
Full-scale testing of the improved VorTeq is scheduled for the month
of October 2017.  Management still expects to meet milestones
set down in this agreement with Schlumberger before the end of 2017.


The effort has given rise to yet another product featuring Energy
Recovery’s pressure pumping technology that is called MTeq. 
The oil and gas recovery involves is a messy business especially
when using a process called ‘mud pumping’.  Drilling mud is
circulated from a mud pit through the well borehole to lubricate the
drill bit and clean-up cuttings.  Conventional pumping
equipment is subject to extreme wear as drilling mud with debris and
sand comes in contact with the pumps.  MTeq serves as a barrier
between the mud pit and the hydraulic pumps, extending the life of
the expensive pumping system. 

Energy Recovery has as high hopes for the potential of the MTeq to
revolutionize oil and gas well operations  –  the same
kind of promotion that accompanied introduction of the VorTeq
system. The apparent endorsement of the VorTeq by Schlumberger sent
Energy Recovery’s stock to historic high prices in the year
2016.  The delay in reaching the market with the VorTeq has
left investors a bit more cautious relative to the MTeq.

The shares sank even further in the final day of trading this week,
plunging into oversold territory.  We believe a candlestick
chart for ERII provides key insight into current sentiment toward
this perennially struggling energy technology company.  The
candlestick that formed up in trading today resembles a cross with
no body and long upper and lower shadows.  This candlestick
results when neither the bullish nor bearish view is able to
dominate the day even as there is buying that drives the stock above
the open as well as selling that drives the stock in the opposite
direction below the open.  The stalemate suggests that the
bearish view that had tried to take over immediately following the
earnings report is well matched by continued interest in the
Company.  The stock set a new 52-week low in the most recent
day of trading and that must have been compelling for investors with
a long-term view on Energy Recovery’s underlying pressure pump
technology.

Debra Fiakas is the Managing
Director of
Crystal Equity
Research
, an alternative
research resource on small capitalization companies in selected
industries.

Neither the author of the Small Cap
Strategist
web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.

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