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In early December 2014, Energy Recovery (ERII: Nasdaq) staged an analyst and investor event in New York City principally to introduce its most recent technology innovation, VorTeq. The product is a hydraulic fracturing solution for the gas industry. Unlike its other products, the VorTeq is a colossal apparatus requiring a semi-tractor to transport it into place as a replacement for the ‘missiles’ now found at natural gas well sites.
In the current configuration, high pressure pumps are used to drive a blend of fracturing sand, water and chemicals down into the well hole. Pump components, including somewhat fragile valves, are at risk of damage when exposed to the highly corrosive fracturing mix. To avoid costly down time for pump repair, fracturing service providers keep a bank of replacement pumps at hand.
Energy Recovery proposes to lease its VorTeq solution as a replacement for the standard missiles. The VorTeq is an energy exchanger, which of course is Energy Recovery’s signature technology and knowhow. Using the VorTeq instead of the standard missile allows the energy from water driven by the high pressure pumps to be transferred to the fracturing mixture without letting the fracturing mixture come in contact with fragile pump components. The point of energy exchange is made in a cylinder-shaped device composed of a few components, all machined from high performance tungsten carbide. Importantly, using the VorTeq instead of the conventional missile requires no other equipment modification.
Essentially Energy Recovery is transferring the point of risk from the fracturing service provider’s pumps to the VorTeq. When queried about the risk of damage to the VorTeq components, the Company’s engineers expressed high confidence that the VorTeq is better able to withstand contact with the abrasive fracturing mixtures. Tungsten carbide is among the most durable materials available. Furthermore, the components of the VorTeq are machined to nanoscale, making it impossible for grains of fracturing sands to slip between the few moving parts in the VorTeq device. If this proves out in the field, Energy Recovery will have brought a vital new technology to the gas industry.
Management spent much of the meeting with analysts explaining the economic proposition for its potential new customers of VorTeq. On average a fracturing pump fleet costs about $4.1 million to maintain each each. This is based on an average 2,000 pump hours per year. Instead of buying a missile, the fracturing services company would lease a VorTeq from Energy Recovery for $1.6 million per year. Pump maintenance costs are expected to immediately decline to about $1.5 million per year, bringing total costs down to $3.1 million. Savings for the year to the fracturing operations would be $1.0 million, arising from maintenance cost reduction.
The Company believes that the $1.0 million in savings for this hypothetical pump fleet will be compelling enough to get fracturing service companies to make the change. Additional savings could be realized from the reduction in total pumps required to performance the same work. Energy Recovery is apparently not relying on this economic benefit in its sales pitch as this is a reduction in capital cost rather than an operating cost savings. Nonetheless, it does not appear that Energy Recovery is ignoring interest among their potential customers in reducing capital costs. The Company intends to offer the VorTeq to fracturing service providers through an operating lease rather than a direct sale. This would replace the usual capital requirement for the purchase of missiles that typically cost $750,000 each.