Focus on climate change a boon for Energy Recovery Inc

Like all other market and industry trends, the rising awareness of and growing attention to climate change issues will create winners and losers.

Companies with products and services that address environmental issues will have better opportunities than those without anything to offer.

One of the emerging winners in the oil and gas industry is Energy Recovery Inc, which is listed on the NASDAQ index under the stock code ERII.

As its name suggests, ERII is a company that helps reduce waste and emissions from heavy industrial operations and mining activities. Its technology is used by some of the largest utility companies around the world.

Though it is a relatively small company compared to other global players, ERII operates in the oil and gas industry which was estimated to be worth around US$4677.45 billion in 2020. The industry is expected to grow to around US$5870.13 billion in 2021 at a compound annual growth rate (CAGR) of 25.5% according to recent industry market research.

Who is Energy Recovery Inc and what does it do?           

Energy Recovery is an engineering-driven technology company founded in 1992. The company was reincorporated in 2001 and became publicly listed in 2008.

Classified as a small-cap company in the oil ad gas sector in the US, ERII is a recognised industry leader in pressure energy technology and a hub of engineering innovation.

At its core, ERII engineers, designs, manufactures and supplies technology for industrial fluid flow processes. This means that ERII has the technology that helps recycle, reduce or convert waste energy into usable energy forms.

Currently, ERII operates in two major segments: water utilities and oil and gas facilities. Its core products are used in saltwater desalination processes and oil and gas mines and refineries.

Strong financial results

During the recent reporting season covering the first quarter of 2021, Energy Recovery revenue surged 34% year over year to US$28.9 million, driven by a 52% increase in revenue.

Net income came at US$6.9 million, or $0.12 per share, up 1100% from $0.01 per share in the year-ago period.

In his statement during the Q1 earnings results, ERII chief executive Robert Mao expressed optimism about the company's progress in developing an energy-recovery device for carbon dioxide commercial refrigeration. This means the company will be able to deploy its technology in other sectors outside the water and oil and gas industries.

Mao said: "We are targeting significant growth throughout this decade from our base business while adding new sustainable technologies based on our pressure exchanger platform technology."

He added: "All of these new markets hold great potential. And, frankly, our core technology (Pressure Exchange - PX) can be applied to many more industries. Our versatile and sustainable technology can play a critical role in reducing the carbon footprint of industries globally at this critical time for our world."

According to Mr Mao, several factors will underpin the expected growth in the coming years.

For one, he said the increasing global water demand due to climate change, combined with a technological conversion, is driving a secular shift in seawater reverse osmosis desalination demand. ERII's technology is now widely used in many large water desalination plants particularly in the Middle East region.

Another area of growth is industrial wastewater, where ERII recently won a contract outside the water and oil and gas industry. Mr Mao said this offers ERII the potential for additional material revenue stream within the next few years.

Recently won contracts

Proving its leadership position in the saltwater desalination sector, ERII has recently announced two major contracts:

• US$11.7 million contract to provide energy recovery devices and related equipment and services to multiple seawater reverse osmosis ("SWRO") desalination facilities in the United Arab Emirates ("UAE").
• US$13.8 million contract to provide energy recovery devices and PX PowerTrain™ system, supporting the construction of the Sorek B Seawater Reverse Osmosis Desalination (SWRO) Plant. The Sorek desalination plant is considered the world's largest seawater desalination facility located about 15 kilometres south of Tel Aviv in Israel.

What analysts are saying about ERII

One of the market analysts covering Energy Recovery Inc said given the growing demand for freshwater (and need for desalination) around the world, ERII has the potential to be a long-term winner.

The same analyst highlighted that some market observers may be underestimating ERII's earnings growth potential. Based on the last four quarters, Energy Recovery surpassed Wall Street's consensus earnings estimates by 100% (first quarter of 2021), 50% (fourth quarter of 2020), 233% (third quarter of 2020), and 230% (second quarter of 2020).

Another industry analyst highlighted that ERII's stock is up 163% in five years and up 17% again in the last three months.

Despite the recent share price performance, ERII still looks cheap according to one analyst who said: "Energy Recovery is still a bargain right now. My valuation model shows that the intrinsic value for the stock is $24.90, meaning that there is still an opportunity to buy now."

He added: "What's more interesting is that Energy Recovery's share price is quite volatile, which gives us more chances to buy since the share price could sink lower (or rise higher) in the future. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market."

Technical Analysis: What the charts say about ERII share price

Between July 2020 and April 2021 a surge in investor demand saw the price of ERII triple from the US$7 region to more than US$21. While a sharp corrective retreat in May this year saw prices dip back below US$17, buyers were quick to re-emerge and lift the stock back to new highs above US$22 by the end of June.

While further volatility and pullbacks cannot be ruled out, the strength of the underlying upward trend favours viewing such moves as corrective while above the May lows.

Conclusion

Given the increasing focus on climate change, net-zero emissions and all things environmental, plus the fact that the company has cutting-edge technology and a leadership position in its industry, ERII is shaping up to be a strong buy contender for the long-term.

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