Here’s Why ERII Stock Soared 162% on Tuesday
Energy Recovery, Inc. (NASDAQ:ERII) won a 15-year, $125 million contract from Schlumberger Limited (NYSE:SLB). California-based Energy Recovery manufactures energy recovery devices (ERDs) that help generate energy using pressure and flowing fluids. The company has clients in the engineering, construction, exploration and oil and gas industries. The deal with Schlumberger has given Energy Recovery the exclusive rights to provide hydraulic pumping systems to the oil field services behemoth. The news is a big deal for the company sending ERII stock soaring over 162% on Tuesday.
What Does This Mean for Energy Recovery Stock?
Energy Recovery’s hydraulic pumping system, VorTeq, will allow Schlumberger to cut down on maintenance costs on its fracking projects, protect its equipment from heavy wear and tear, and increase efficiency by avoiding pumping failure.
Under the deal, ERII is receiving an immediate injection of $75.0 million with the rest of the money to come in two equal payments of $25.0 million over the next year, subject to it meeting Schlumberger’s performance benchmarks. The money will help Energy Recovery to put itself back on track of profitability.
The deal with the oil industry giant, Schlumberger, will also open doors to more and likely bigger future deals for Energy Recovery. The company’s products are expected to receive good reception in the oil and gas industry as more and more oil companies will turn towards ERII’s pumping systems in order to streamline their costs in line with crashing oil prices.
What Should Energy Recovery Stockholders Do Next?
Energy Recovery has a sound balance sheet with $18.0 million in cash reserves, no long-term debt, and significantly low liabilities compared to five times higher current assets. Cash flows have also improved over the last fiscal year. However, the income statement is not very attractive with negative earnings resulting from heavy selling and administrative expenses. But the good news is that insiders have been racking up on ERII stock in the last 12 months, indicating faith in the company’s future prospects.
I see some good news coming out of the company if the management uses the money in the right way to step up its revenue and cut down its administrative costs. I’m waiting for a few more months as synergies from the deal start flowing to ERII stockholders before betting on the stock.