According to a MarketsandMarkets research report on Water Desalination Equipment Market, the water desalination industry is estimated to grow 9% annually to be worth $15.27 billion by 2018. The report cites that the Middle East region is the largest market for water desalination equipment as it is witnessing the biggest number of activities in utilities, construction, and industrial end-uses in countries including Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar. Water desalination vendor Energy Recovery Inc. (ERI) (NASDAQ: ERII) is already benefiting from the contracts out of the region.

Energy Recovery’s Financials

For the recently announced second quarter, Energy Recovery’s revenues grew 26% to $13.2 million, and earnings came in at a penny a share.

By segment, product revenues grew 14% to $11.97 million. It recognized $1.3 million in license and development revenue during the second quarter. This revenue is related to the amortization of the $75 million exclusivity fee paid by Schlumberger in the fourth quarter of 2015. Last year, Energy Recovery had won a $125 million, 15-year licensing deal with Schlumberger Technology Corporation to commercialize its VorTeq™ hydraulic pumping system for use in onshore hydraulic fracturing. VorTeq is the first hydraulic fracturing manifold (“missile”) built to isolate hydraulic fracturing pumps from abrasive proppants.

Energy Recovery does not give an outlook, but analysts estimate that the company will see strong growth in the oil and gas sector and estimate the revenue to grow from $0.8 million in 2014 to $71.5 million by 2018. On a longer term, these revenues are estimated to grow to $200 million annual run rates.

Energy Recovery’s Middle East Growth

Recent news reports suggest the company is getting big deals. Last month, it announced the finalization of a purchase order for a contract worth $11 million. The contract is to offer its IsoBoost technology for integration into a major gas processing plant to be constructed in the Middle East. The deal signifies the advancement of the company in the gas sector. The deal will require Energy Recovery to supply and install several IsoBoost systems for the new-build plant, each designed with a flow capacity of about 6,000 gallons per minute.

In the Middle East again, Energy Recovery recently announced that it had been granted total awards of $5.4 million to supply its PX Pressure Exchanger technology for desalination projects. The contracts will require Energy Recovery’s pressure exchanger devices for the plants that will produce a maximum of 300,000 cubic meters of water per day. They will help cut down the power consumption for the projects by 31.4 MW and save over 275 GWh of energy per year.

Its stock is trading at $11.98 with a market capitalization of $627 million. It touched a 52-week high of $13.35 in April this year. It has recovered significantly from the 52-week low of $2.07 it had fallen to in in September last year.

The stock is also receiving outperform rating from several analysts. Last month, analysts at FBR supported my views with their rating. Analysts believe that Energy Recovery will benefit from both a modest acceleration in Water award flow and a transformative surge and mix shift in its earnings power which will be driven by its success in the oil & gas sector and in the hydraulic fracturing market. FBR estimates a price target of $14.00.

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